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Flassbeck Spiecker.Indd A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Flassbeck, Heiner; Spiecker, Friederike Article — Published Version The euro: A story of misunderstanding Intereconomics Suggested Citation: Flassbeck, Heiner; Spiecker, Friederike (2011) : The euro: A story of misunderstanding, Intereconomics, ISSN 1613-964X, Springer, Heidelberg, Vol. 46, Iss. 4, pp. 180-187, http://dx.doi.org/10.1007/s10272-011-0381-8 This Version is available at: http://hdl.handle.net/10419/68312 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu DOI: 10.1007/s10272-011-0381-8 Invited Paper Heiner Flassbeck* and Friederike Spiecker** The Euro – a Story of Misunderstanding From the very beginning of the European Monetary Union the crucial institutions, the European Commission and the European Central Bank, led by mainstream economic thinking, were not up to their task of controlling the core of the system effectively. A huge gap in competitiveness among the member states has arisen due to German wage-dumping policy on the one hand and, on the other, wage growth in Southern Europe which is above the growth of productivity plus the infl ation target of 2%. A European-wide coordination of wage policy is the only promising way to close this gap. However, as wages and competitiveness are not high on the agenda of the politicians responsible and their advisers, time to save the euro is running out. The European Economic and Monetary Union (EMU) The Roots of the Misunderstanding is facing increased international and internal scrutiny. More and more observers are questioning the viability The core of a monetary union is the agreement of all of a monetary system with absolutely fi xed nominal ex- member states on a target infl ation rate and nothing else. change rates but dramatically divergent real exchange A monetary union is not a union of harmonised public rates and real interest rates. Even worse, despite the ac- budget targets or of harmonised holiday entitlements. celerating pace of divergence and the everyday threat But unfortunately, many of those who were in favour of the of panic in the money markets of vulnerable member monetary union had, and still have, an unbalanced view states, European politics at the highest level fails to un- of the constitutional elements of a currency union. The derstand the cause of the crisis and to address it with a focus of the EC and the member states on government consistent plan. A recent statement by Chancellor Mer- defi cits and public debt was driven by the overwhelming kel about the impossibility of having different holiday neoliberal agenda to minimise government and replace it entitlements in the member states of a monetary union1 with the private sector wherever possible. Instead of be- proves this with unprecedented clarity. ing alerted by the dramatically divergent development of prices, wages and unit labour costs, they fi ne-tuned the This is particularly tragic, as the monetary union was an rules for budgetary discipline time and again. excellent economic idea. Its foreseeable failure will pre- vent many useful attempts in the future to replace the va- But even today the deluge of comments on the EMU cri- garies of the fi nancial markets in determining exchange sis overlooks the crucial infl ation divergences and the rates with an orderly adjustment of the value of curren- induced external imbalances inside the monetary union. cies to the fundamentals. But the best idea is useless if Greece’s budget problems and those of other south- its protagonists and those politicians putting it into prac- ern members of the EMU are a problem, but they are tice fail to understand it. In this respect, the history of closely related to external defi cits. On the other hand, the euro is a story of misunderstanding. From the outset Germany’s sound budget position is to a large degree neither the European Commission (EC) nor the Europe- the result of the huge external stimulus it got in the last an Central Bank (ECB) was up to the task of controlling decade. Spain even provides an example of a country the core of the system effectively. This is potentially the under scrutiny despite a strong budget position because result of the failure of mainstream economic thinking. its external defi cit before the crisis was huge. The crucial institutions were misled from the very begin- ning. They began to realise their failure only in the face Wage and price divergence is at the core of the trouble. of the crisis – but time is now running out for successful A monetary union is primarily an agreement on infl ation, changes to save the euro. because each member state explicitly forgoes its right to have a national monetary policy and its own infl ation target rate. All other targets may be of use in one way or * Director, Division on Globalisation and Development Strategies, UNCTAD, Geneva, Switzerland. 1 See Spiegel Online 18 May 2011, http://www.spiegel.de/politik/deut- ** Economist and freelance writer, Schwäbisch Gmünd, Germany. schland/0,1518,763247,00.html. Intereconomics 2011 | 4 180 Invited Paper Figure 1 Figure 2 Historically Large Trade Imbalances1 EMU Countries: Unit Labour Costs Drive Prices 8 Start of EMU 6 20 Unit Labour Costs2 Germany2 4 15 France 1 2 Prices 10 0 5 2 4 0 Southern Europe3 Balance in per cent of GDP 6 5 ECB's inflation target of 2% Yearly growth rate in per cent 8 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 1996 1998 2000 2002 2004 2006 2008 2010 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1960 1962 1 Current account balance in per cent of GDP; negative values: defi cit, 1 GDP defl ator. 2 Compensation of employees (total economy) in ECU or positive values: surplus. 2 1960-1990 West Germany. 3 Greece, Portugal, euro per employee divided by real GDP per employed person; concept of Spain and Italy. fulltime equivalents where available. Source: AMECO database (updated May 2011); own calculations. Source: AMECO database (updated May 2011); own calculations. another to reach the infl ation target as a by-product of The consequences of this diagnosis are straightforward sorts, but if the union is not able to agree on the need but diffi cult to swallow for the standard-bearers of the to keep infl ation and its main determinants in all coun- mainstream economic approach in the EC and ECB. A tries on the target path forever, all other attempts to har- monetary union in agreement about an infl ation target of monise the one or the other variable will be in vain. In a close to two per cent has to coordinate wage develop- world of absolutely fi xed exchange rates or in a single ments in the member states. This is the case because currency area, a lasting deviation of prices and unit la- the most important determinant of infl ation is unit labour bour costs in one country from its main trading partners cost growth (Figure 2). Wages and unit labour costs reli- creates unsustainable external defi cits and threatens the ably determine prices. As long as trade unions accept economic survival of the currency arrangement, includ- their responsibility for the infl ation target, monetary poli- ing a currency union. cy is free to stimulate the economy to reach other targets like a high level of employment and can abandon its ex- The key for the future of EMU, if there is any, is to be found clusive control of infl ation. in external adjustment in all countries and not in lopsided government belt-tightening around the Mediterranean This leads to the roots of the misunderstanding. For Sea. It is the external imbalances that will force the disso- the EC as well as the ECB, as strong believers in free lution of EMU if strong corrective action is not taken soon. markets, monetarism and in particular fl exible labour The imbalances are historically large (Figure 1) and force markets, the approach to guarantee a low but positive adjustment on both sides. If the surplus country refuses infl ation rate based on monetary policy for the union as to become a defi cit country, default of the debtor is una- a whole instead of wage coordination was overwhelm- voidable, because a long and painful recession that would ingly attractive. But in reality the relationship of money produce a surplus only through the fall of imports will be to infl ation is weak, and even if it were relevant it would politically unfeasible. This is the same logic underlying the only play at the level of the union as a whole.
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