Euro in trouble?

English weblog England Expects has an intriguing post on the vitality of the euro. More precisely, about its lack of vitality:

For the first time, an official French report has criticised the Euro. Indeed, the latest report of the Council for Economic Analysis (CAE) given to the French government on 23 March, “Economic policy and Growth in Europe” and written by Philippe Aghion, Élie Cohen and Jean Pisani-Ferry, draws up for the first time a really tough assessment on the single currency and the actions of the Euro zone.

I have no time to comment, as usual, but the report is definitely worth a read (308 pages). Teaser:

“Economic integration has stagnated and no longer promotes growth. The euro’s creation has not produced the knock-on benefits expected. The increase in trade has been relatively modest and financial and credit markets remain segmented. The single currency even seems to have had a “numbing” effect on the EU members, which no longer need to protect against a foreign-exchange crisis and have become complacent in their efforts to control spending and make structural reforms. Moreover, the euro area’s macroeconomic framework has become obsolete. Furthermore, the Lisbon strategy has become bogged down in procedures and has degenerated into rhetoric. This is because it doesn’t have the means to achieve its objectives, since EU-members remain responsible for supply-side policies and the political economy of reform is still mostly national.”

You can find the report here (pdf).

8 thoughts on “Euro in trouble?

  1. Well what kind of ‘report’ can you expect from a blog that kisses the Queen’s @$$? As long as we don’t become like England the Euro can’t be all bad.

  2. From a letter to the Financial Times in February 1998, it seems many German professors of economics had no illusions about prospects for European monetary union:

    “More than 150 German economics professors have called for an ‘orderly postponement’ of economic and monetary union because economic conditions in Europe are ‘most unsuitable’ for the project to start.

    “The call to delay Emu ‘for a couple of years’ is made in a declaration signed by 155 university professors and sent to the Financial Times and the Frankfurter Allgemeine Zeitung newspaper in Germany. It signals intensified opposition to the government’s euro policy.

    “The declaration was organised by Manfred Neumann, professor of economic policy at Bonn university and chairman of the Bonn economics ministry’s council of expert advisers. It signals concern among professional economists about Bonn’s determination to begin the single currency on January 1 1999. . . ”
    http://www.internetional.se/9802brdpr.htm

    Of course, such a non-conformist assessment was unacceptable although, in retrospect, Jacques Delors seems to have agreed with the substance of it in an interview with The Times at the beginning of 2004:

    “JACQUES DELORS, the former President of the European Commission, fuelled the controversy over the euro yesterday by admitting that Britain was justified in opting out of the single currency because its launch was flawed.

    “In a remarkably frank interview with The Times, the one-time bogeyman of Eurosceptics also predicted that Britain would stay out for years, not least because Gordon Brown was so ‘passionate about his contempt for Europe’.

    “In another startling admission, the veteran French leftwinger said that the European Union was in a ‘state of latent crisis’ because of weak leadership. He blamed member state leaders, including President Chirac of France, for putting national interests before the common good.”
    http://www.timesonline.co.uk/article/0,,740-967150,00.html

    Vive La Reine!

  3. The problem is not the euro it is the countries themselves. Ireland is in the Euro and the economy is booming. Infact the fact that we are linked to the euro’s low interest rates is helping alot

  4. I wonder how much of Ireland “boom” is due to Ireland being the corporate tax haven of Euroland. HP, Dell, Microsoft don’t earn any money anywhere in Europe but in Ireland last time I checked…

  5. Bang to rights. Ireland’s booming economy is more likely due to the scale of foreign direct investment (FDI) attracted, among other factors, by Ireland’s low taxes than by Ireland being in the Eurozone.

    Try: OECD Factbook 2006, for Total Tax Revenues as a Percentage of GDP, and Taxes on the Average Production Worker:
    http://puck.sourceoecd.org/pdf/fact2006pdf/09-03-01.pdf
    http://puck.sourceoecd.org/pdf/fact2006pdf/09-03-02.pdf

    As for FDI:
    http://miranda.sourceoecd.org/pdf/fact2006pdf/11-02-01.pdf

    The downside for Ireland of being in the Eurozone is the loss of national monetary autonomy. The low interest rates set by the European Central Bank to curb the average inflation rate across the whole Eurozone have resulted in a house price bubble in Ireland. Britain has a house price bubble despite the much higher interest rates set by the Bank of England. Being in the Eurozone would have exacerbated the problem.

    The conclusions in a recent OECD study on house prices:

    “The literature reviewed for this study was confined to recent research. It suggests that prices are broadly in line with what were identified as their main determinants in Denmark, Finland, France, the United States and Norway. The findings are mixed for the Netherlands. However, they uniformly point to significant overvaluation in the United Kingdom, Ireland and Spain.”
    http://www.oecd.org/dataoecd/41/56/35756053.pdf

    The risk inherent in house price bubbles is the possibility of a downstream crash and the consequential instability that the crash would bring.

  6. Laurent a lot. Nothing stoping the rest of Europe copying us though.

    Lowest unemployment in the Euro zone second highest minimum wage in europe can’t be all bad.

  7. Size does matter. Luxembourg is even richer because it can per capita spons off even more German, French and Belgium tax money

  8. Isn’t the problem with the euro that it is a convenient scapegoat? Italy’s problems are not the euro as much as it is the refusal to accept reforms. All a lira would do is wrap the country in enough wool to prevent reforms for a few more years by which time it would have even more catching up to do.

    It is far from clear that the pound is a suitable currency for all of the United Kingdom or that the euro poses the same problems for Milan as it does for Naples or for Barcelona and Extra Madura or that the Mark was an appropriate currency for both East and West Germany.

    Of course the same arguments could be used to justify the gold standard but the steps needed to accomodate the euro are mostly desirable. Whinging about the euro is just natural for governments running out of excuses for not grasping nettles.

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