Euro divides European economies

December 1, 2004

Free Market Foundation

Supporters of the euro argued that a single currency would synchronise the euro-zone economies and better align European business cycles. According to the Economist, the opposite appears to have happened. Some countries like Spain are soaring, while others like Germany are doddering.

According to the Deutsche Bank, many elements of economic growth are widely divergent in the European economy. They analysed European gross domestic products (GDP) between 1998 and the first quarter of 2004. They found:

Consumption (the largest portion of GDP) was buoyant in Spain, France and Finland, but flaccid in Germany, Italy and the Netherlands.

Currently, consumption is more divergent between the individual European economies than before the euro.

Capital spending in Germany fell by 6.3 percent during the period, while in Spain it rose by 26.3 percent.

The article argues that the euro is partially to blame. Countries entered the single currency from very different starting points. Once in the euro, these differences paved the way for increasing divergence in real growth. For example:

Monetary policy has been too tight for sluggish Germany, but too loose for faster-growing countries.

Labour-market rigidities aggravate real divergence, by failing to allow wages to adjust to local circumstances.

The stability and growth pact (a component of the euro unification) led to inflexible fiscal policies that needlessly deepened recessions.

Source: Growing Apart – Economic Focus, Economist, October 2, 2004.

For text: http://www.economist.com/printedition/displayStory.cfm?Story_ID=S%27%29%28%24%28P1%5B%23%200%20%5C%0A

For more on International Institutions and Growth http://www.ncpa.org/pi/internat/intdex1.html

FMF Policy Bulletin/ 23 November 2004