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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
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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