The Eurozone: Economists respond to Juncker’s State of the Union speech

Wouter den Haan, Martin Ellison, Ethan Ilzetzki, Michael McMahon, Ricardo Reis 20 September 2017

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In Jean-Claude Juncker’s latest ‘State of the Union’ annual address, the president of the European Commission said the following:1

If we want the euro to unite rather than divide our continent, then it should be more than the currency of a select group of countries. The euro is meant to be the single currency of the European Union as a whole. All but two of our Member States are required and entitled to join the euro once they fulfil all conditions.”

The first question of the latest CFM-CEPR expert survey asked panel members the following from an economic point of view:

Question 1: Do you agree that euro membership should be compulsory for all EU member states?

Sixty-four panel members answered this question. A strong majority of 76% either disagree or strongly disagree; 11% neither agree nor disagree; and 14% either agree or strongly agree. The outcome is similar when the answers are weighted with self-reported confidence levels.

Among the panel members who disagree, several highlight the importance of having the right economic conditions for a monetary union to be mutually beneficial. Kevin O’Rourke (University of Oxford) says that the Eurozone “isn't an optimal currency area as it stands. Broadening it won't help. I see no sign of the EU wishing to put in place a genuine fiscal union, or even a genuine US-style banking union.”

Similarly, Thorsten Beck (Cass Business School) argues that “[b]usiness cycles and economic structures across EU countries are too different to justify one currency. The Eurozone crisis has shown that too diverse a group of countries do not make a sustainable currency area – diversity not only in economic structure and cycles but also institutions.”

A more general argument is put forward by Martin Ellison (University of Oxford) who comments that “in economics we typically want to make something compulsory if there is a clear market failure… I don’t see what the market failure is here that would need such compulsion. Shouldn’t the benefits of a monetary union be sufficient to ensure that countries like Sweden and Poland join willingly?” A related view is expressed by Simon Wren-Lewis (University of Oxford): “This is politics driving economics, yet again.”

Panel members who disagree with the idea of compulsory euro membership also point to the problems that Eurozone countries have faced. Michael Wickens (University of York) says that “[m]embership of the euro has proved disastrous for Greece, Ireland, Italy, Portugal and Spain as it has given them the wrong monetary policy and, through persistently higher inflation and negative real interest rates, caused a huge loss of competitiveness and fuelled over-borrowing and excessive indebtedness.”

Several of the experts who disagree with the idea of compulsory euro membership argue that a common currency could be bad for a unified EU. Jürgen von Hagen (University of Bonn) writes: “The euro has already proven destructive and divisive for the countries currently using it. It would be foolish to repeat the earlier mistakes of making countries adopt the euro which are not ready for it. It would be even more foolish to force countries to adopt the euro which do not wish to do so. This would further weaken the European Union.”

By contrast, experts who agree with the statement stress the role of the euro for further economic and political integration. Panicos Demetriades (University of Leicester), who strongly agrees, emphasises the need for further integration and the role of the euro. He argues:

“Without further integration, the risks of rising nationalism and populism pose a serious threat. Further economic convergence is needed and better social safety nets. Sooner or later some degree of fiscal federalism will be needed and the use of the common currency makes all aspects of integration a lot easier. It also makes Europe a more powerful force internationally. The momentum needs to be maintained, so that in one or two generations, citizens of Europe will not know any alternatives. At that stage, Europeans will begin looking like the United States. Does anyone today think that California or Florida could have their own currencies?”

Fabrizio Coricelli (Paris School of Economics), who also strongly agrees, writes: “As the EU is meant to provide a framework for full economic integration, it makes little sense to have some EU members outside the euro. This differentiation potentially puts in motion disintegration forces.”

Volker Wieland (Goethe University Frankfurt), who neither agrees nor disagrees, points out that “it is a fact already that all EU member states except Denmark and Great Britain are required to adopt the euro once they fulfil the conditions. I agree that it is a fact at this point. I would not recommend starting an initiative to change the current rules.” He continues: “I think great care should be given to the economic conditions. Clearly, there've been mistakes in the past, and countries admitted based on faulty data or insufficiently sustainable conditions.”

The euro: Benefits versus costs

Juncker's remarks once again raise questions about the success of the euro (or lack thereof). The second question of the survey asked the panel of experts to make an overall judgement.

Question 2: Do you agree that the euro has had more benefits than costs?

Sixty-six panel members answered this question. Only a small minority disagree: 50% either strongly agree or agree; 24% neither agree nor disagree; and 26% either strongly disagree or disagree. When answers are weighted with self-reported confidence levels, then the fraction disagreeing increases slightly to 27%.

Several of our panel members point out that this is a difficult question to answer. One reason is that it is not clear what institutions would have been in place in the Eurozone countries without the euro. Moreover, this question has many dimensions and requires weighing of the impact of the euro for different countries and across different time periods.

The views of the majority are nicely summarised in comments made by David Cobham (Heriot-Watt University): “There have been and are significant benefits – better monetary policy for many countries, lower transactions costs, a more stable external exchange rate, etc. – but the way the Eurozone has been operated has also imposed significant costs, notably since 2010-11. However, it should be possible to eliminate those costs without losing the benefits.”

Several experts argue that there have been winners and losers. John Van Reenen (MIT), who neither agrees nor disagrees, says: “The euro has had benefits, especially for core countries. But for peripheral countries the effect has been adverse as exemplified by Greece where an extreme adverse shock could not be partially offset by exchange rate flexibility.”

Some panel members see advantages outweighing disadvantages for a larger set of countries. Tomasso Monacelli (Bocconi University), who agrees, argues that “on net, the benefits have outweighed the costs for all countries, although the benefits have not been shared evenly.”

Disagreement among macroeconomists is often due to weighing the importance of different aspects of a problem differently. What is somewhat unusual about this survey is that there is also some disagreement about the benefits and/or costs of particular channels.

For example, Ray Barrell (Brunel University), who strongly agrees, points out that “[r]emoving exchange rate volatility encourages trade and investment, and this gain outweighs any costs for most countries. The euro cements this gain.” On the other hand, Ethan Ilzetzki (London School of Economics), who disagrees, writes “it is hard to detect any substantial trade benefits to the currency union.”

A similar battle of opinions can be found regarding the loss of independent monetary policy induced by the euro. Albert Marcet (Institut d’Analisi Economica), who agrees, argues that the euro “has given monetary discipline to countries that used to have chaotic monetary environments.”

By contrast, several respondents point to the costs of not having an independent monetary policy. Joseph Pearlman (City University London), who neither agrees nor disagrees, writes “one interest rate for all is never going to be ideal unless, as in the US, there is fiscal federalism.”

Finally, panel members also disagree on the role of the euro in the Eurozone crisis. Ramon Marimon (European University Institute), who agrees, writes “the main cost has been the euro crisis… if not having benefited from low euro interest rates they [periphery countries] probably would have not accumulated so much debt.” And while Pietro Reichlin (Università LUISS G. Carli) also agrees, he does comment “I think that many of the problems that plagued part of the EU after the big recession would have emerged anyway.”

Endnotes

[1] The full speech can be found at http://europa.eu/rapid/press-release_SPEECH-17-3165_en.htm.

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Topics:  EU institutions EU policies

Tags:  eurozone, euro, Juncker

Professor of Economics and Co-Director of the Centre for Macroeconomics, London School of Economics and CEPR Research Fellow

Professor of Economics at the University of Oxford and Professorial Fellow of Nuffield College

Assistant Professor, London School of Economics

Professor of the Department of Economics and Fellow at St Hugh's College, University of Oxford.

A.W. Phillips Professor of Economics, LSE and CEPR Research Fellow

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