Unfinished business — Europe’s currency 20 years on

30/12/2018

By Valentina Romei

The euro has been a success but it has been hampered by structural flaws and reform is slow

On January 1 1999, 11 countries fixed their exchange rates and created a new currency: the euro. Three years later euro coins and notes came into circulation. Eight additional countries have joined the currency over the following years and seven more could join once they meet the criteria.

After 20 years, the euro has been a successful project measured by its adoption and support. Three-quarters of people in the eurozone are in favour of the euro, the highest since 2004 — seemingly dispelling the impression of rising anti-euro sentiment in many countries.

Yet all is not well with the euro — as even its most ardent advocates acknowledge. The crisis of the past decade revealed defects in its architecture that member countries have been trying to address. Reform is slow — and the gap between rich and poor member states remains large.

A GLOBAL CURRENCY
The euro has become the second most important currency in the world. It accounts for 36 per cent of global payments and 20 per cent of all central banks’ foreign reserves, second only to the dollar.

The euro is used by 340m people in 19 countries. Another 175m people outside the eurozone either use it or peg their own currency to it.

About 38 per cent of the eurozone population has not known any other currency in their adult life. The process of mentally converting to a country’s former currency is a thing of the past.

In all countries of the eurozone, a majority are in favour of the euro.

A PROMISING FIRST DECADE
In line with expectations, the creation of the euro boosted intra-eurozone capital flows. Cross-border claims of euro-area banks rose from below €1tn in 1998 to close to €10tn in 2008, according to the Bank for International Settlements.

Detailed data from the ECB shows that bank lending to other banks in the eurozone increased to about one quarter of all bank-to-bank lending in 2008. Bank lending to businesses in other eurozone countries increased to a peak of 5.3 per cent of all bank lending to businesses in March 2009.

Intra-euro area trade more than doubled between 1999 and 2008, but it remains largely stable as a share of total trade largely because of rising trade flows with Asia.

CRISIS — AND A CHALLENGE TO SURVIVE
When the euro-area crisis hit, capital flows were reversed as markets grew concerned about whether the eurozone would start to break up. “Many investors reached the conclusion that the only way out for crisis-hit countries was for them to exit from it,” said Mario Draghi, president of the ECB, in May. “Fearing redenomination into lower-value currencies, investors sold off domestic assets”.

But eurozone member states took various measures to keep together. In 2010, The European Financial Stability Facility was created as a temporary crisis tool to provide financial assistance to Ireland, Portugal and Greece, providing total loan commitments of €175bn. Later on, a permanent sovereign bailout fund was created with a maximum lending capacity of €500bn, the European Stability Mechanism.

TODAY: A LARGE GAP BETWEEN RICH AND POOR
The recovery brought some convergence in inflation and interest rates — but this was less so in general economic and social terms, particularly among the old euro members.

Daniel Gros, director of CEPS, a European politics think-tank, showed in a recent paper that the newer eurozone members of central and eastern Europe have been catching up in terms of income per capita, but “the north has diverged from the south since the start of the financial crisis”.

The same divergence can be observed for indicators such as real wages, investment and productivity. According to the OECD last year, a worker in Germany or Belgium was able to produce about $70 of output in an hour: about double the value in Greece and Portugal, after correcting for price differences.

“Countries with low initial productivity have had consistently lower total factor productivity growth and experienced a sharper slowdown over recent years”, says an IMF report on eurozone convergence.

UNFINISHED BUSINESS
Since its creation, member states have taken many steps to improve the eurozone’s resilience to crises, including creating a banking union and capital market union. Yet both remain incomplete.

The lack of deeper financial integration leaves smaller banks largely exposed to their home economy — and prone to cut lending, hampering any recovery, during an economic downturn. “But if there are cross-border banks that operate in all parts of the union, they can offset any losses made in the recession-hit region with gains in another, and can continue to provide credit to sound borrowers” said Mr Draghi in May.

Brussels’ proposals to deepen Europe’s monetary union range from creating a European monetary fund to a European minister of economy and finance. And in December the EU agreed to strengthen the ESM and create a eurozone budget — in principle if not yet in detail. It is a harbinger of change to come in the next two decades of the euro.

The budget plan was “minuscule in size and still completely inadequate”, said Erik Nielsen, group chief economist at UniCredit, in a note. “But Rome was not built in a day, and so long as we get (even the tiniest) steps in the right direction, hope remains.”

Πηγή

Σχετική δημοσίευση εδώ.