They promised ‘euro convergence.’ Now look what we’ve got!

12 July, 2015 at 15:43 | Posted in Economics | 6 Comments

These data suggest that while there is evidence of euro area convergence in terms of long-term interest rates and the real exchange rate (which would be expected given the common currency and regional short-term interest rate), there is surprisingly little evidence of euro area policy convergence in terms of economic growth, employment, and inflation. Helping to explain the lack of economic convergence in terms of these primary policy outcomes, the data also show relatively little euro area convergence, even increased divergence, in terms of government spending, a primary fiscal policy instrument.

Matt-Kenyon-illustration-009In short, a common regional monetary policy has not been sufficient to produce convergence in terms of the most politically important macroeconomic policy outcomes (e.g. growth, employment, and inflation) when there remains divergence among EMU member states in terms of their fiscal policies. Indeed, given the European Union’s (EU’s) inability to enforce the terms of its Stability and Growth Pact (SGP) and varying national preferences for fiscal policy expansion, economic policy divergence seems likely to persist, even expand as more (and less developed) national economies enter into the euro area …

To conclude, what have political scientists learned after ten years of experience with a common currency and monetary policy in Western Europe? Despite all the optimism associated with regional policy convergence during a period of favorable economic conditions in the late 1990s, we have learned that economic policy convergence among the euro area countries has not continued after 1999 and may have even reversed in certain dimensions. For policymakers, the lack of policy convergence means that European monetary union rests on a fragile foundation; indeed, this foundation will likely become even more problematic as the EU’s new less developed national economies formally enter into the euro area. For IPE scholars, the lack of EMU policy convergence means that convergence theory has not demonstrated much validity even in its most favorable empirical domain.

David Bearce Journal of European Public Policy

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  1. Reblogged this on Forwardeconomics.

  2. “ten years of experience with a common currency and monetary policy in Western Europe”
    I would say “a ten year experiment” instead🙂

  3. “For policymakers, the lack of policy convergence means that European monetary union rests on a fragile foundation; indeed, this foundation will likely become even more problematic as the EU’s new less developed national economies formally enter into the euro area.”

    Quite. The European project became derailed with the rapid expansion eastwards, which made the prospect of fiscal and political union remote and had major competitiveness effects on the Southern periphery countries. This expansion was in fact something pushed by Britain and the US for security reasons.

    The only way they can get out of this and save the European Project is a two-speed Europe – integrate those economies already most similar first. I would say that would mean restricting it to the current Eurozone and for now not admitting any more members.

  4. It’s looking more like Euroconvergence morphing into German hegemony,

    Below is a link to an interview on Australian national radio by Yanis Varoufakis post today’s in principle settlement between Greece and the Troika. He states that Schauble confided in him a plan for fiscal union with a strong German hand at the tiller, with expulsion of Greece from the Eurozone as a means of instilling fear in and subjugating France (and presumably the other southern European states). Varoufakis’ revelations are stunning and disturbing to say the least.

    [audio src="http://mpegmedia.abc.net.au/rn/podcast/2015/07/lnl_20150713_2205.mp3" /]

  5. There is not actually a need for growth in GDP/head to converge as long as the wage in a low GDP/head country reflects that low GDP/head. In the decade 2000-10 Greeks paid themselves three times the wage increases (in terms of Euros) that Germans did.

    Germans were a bit too spartan and hair-shirt in that their inflation in that decade averaged 1.5% rather than the 2% target. But I suspect it was mainly Greeks’ fault for paying themselves far too much relative to their productivity increases.


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