The First Chink of Light

There is a very interesting article in todays Financial Times. For the first time an executive board member of the ECB – Lucas Papademos – has spoken openly about the difficulties presented by having a single monetary policy for such a diverse set of economies. In fact these comments take on more significance in the light of the fact that Papademos is vice President of the ECB, and widely tipped to replace Otmar Issing as Chief Economist when Issing retires.

“In a speech at an ECB conference in Frankfurt, Mr Papademos argued that economic growth and inflation differentials within the eurozone since the introduction of the euro had been similar to regional variation in the US.

But Mr Papademos observed “significant and persistent divergences in measures of competitiveness between member countries”. The extent and cumulative effects of such differences “raise concerns about their impact on growth”. He said “the persistence of these developments suggests that the adjustment mechanisms are functioning slowly”.

Eurozone divergences were “fundamentally” the result of structural factors,” Mr Papademos argued.

Although the ECB vice-president did not mention countries, Italy’s plunge into recession this year is widely blamed on its loss of competitiveness and inability, as in the past, to use devaluation as an escape route. Luigi Buttiglione at Rubicon Fund Management said Mr Papademos’s remarks would fuel “some doubts about the sustainability of monetary union”.

Mr Papademos said that at the time of the single currency’s launch observers saw it as a “reform whip” to encourage competition, productivity and market flexibility. But a paper to be presented on Friday at the ECB conference suggests the opposite.

Romain Duval and Jorgen Elmeskov, economists at the Organisation for Economic Co-operation and Development, say “the absence of monetary policy autonomy seems to be associated with lower structural reform activity in large, more closed economies”.

Stephen Nickell, a member of the Bank of England monetary policy committee, added that empirical results pointed to the “rather depressing conclusion that one of the effects of economic and monetary union is to weaken the incentives for structural reform in the larger member countries”. “

The entire speech can be found here. It is clear that the emphasis is on the need to force through the structural reforms, nevertheless the admissions are significant.

The conference agenda and papers can be found here

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

3 thoughts on “The First Chink of Light

  1. It is clear that the emphasis is on the need to force through the structural reforms

    Quite so.

    It is the rules that underpin the single currency on deficit limits that are perhaps the biggest driver of structural reform in the Eurozone. Clearly governments that are politically unable, or ideologically unwilling, to carry out necessary reform will ultimately undermine the single currency, and create exactly the kind of economic disharmomy and tension that now exists. This fact has been evident for a number of years now but in the rush of enthusiasm to introduce the single currency it was ignored, shouted down, papered over, and in some instances dismissed as lie; but the truth always comes out eventually!

    The liberal economic model, loathed by many in France and Germany, is in many respects an inevitable consequence of membership of the ?uro.

  2. Let?s remember how crucial a role Delors has had in setting all this up, and that as Finance Minister he presided over some very drastic and painful reform policies that were largely continued by subsequent French governments.

    These reforms eventually boosted France towards the top of the productivity per hour league in Europe, growth rates greater that Germany?s and a comfortably leisured lifestyle for those with jobs.

    The vision was one of sacrifice domestically, including price deregulation, denationalisation with attendant job-losses, and a strong currency, inseparable from greater integration on the European level. It was very costly politically for the socialist government he was part of, but it worked.

    So when Delors said that the launch of the Euro was flawed because the necessary harmonisation of policies was not in place, perhaps what he meant was that the informed political commitment to reform, and the willingness to pay the political price, was absent ? in France and Germany as well as in Italy and elsewhere. If you truly desire the end, you desire the means, and you assume your responsibility.

    My guess is that the European elite will have to wait for Merkel, Sarkozy and who knows who in Italy before they once again regain their coj ? sorry, start thinking of themselves as serving Europe and the nation by giving it what it needs but doesn?t want. The scale of Jospin?s defeat still scares even the right.

    There?s a very interesting analysis of all this here.

    http://www.wcfia.harvard.edu/conferences/tiberghien/papers_pdf/TiberghienChapter4-France.pdf

  3. Let?s remember how crucial a role Delors has had in setting all this up, and that as Finance Minister he presided over and initiated some very drastic and painful reform policies that were largely continued by subsequent French governments.

    These reforms eventually boosted France towards the top of the productivity per hour league in Europe, growth rates greater that Germany?s and a comfortably leisured lifestyle for those with jobs.

    The vision was one of sacrifice domestically, including price deregulation, denationalisation with attendant job-losses, and a strong currency, inseparable from greater integration on the European level. It was very costly politically for the socialist government he was part of, but it worked.

    So when Delors said that the launch of the Euro was flawed because the necessary harmonisation of policies was not in place, perhaps what he meant was that the informed political commitment to reform, and the willingness to pay the political price, was absent ? in France and Germany as well as in Italy and elsewhere. If you truly desire the end, you desire the means, and you assume your responsibility.

    My guess is that the European elite will have to wait for Merkel, Sarkozy and who knows who in Italy before they once again regain their coj ? sorry, start thinking of themselves as serving Europe and the nation by giving it what it needs but doesn?t want. The scale of Jospin?s defeat still scares even the right.

    There?s a very interesting analysis of all this here.

    http://www.wcfia.harvard.edu/conferences/tiberghien/papers_pdf/TiberghienChapter4-France.pdf

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