A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Celi, Giuseppe; Guarascio, Dario; Simonazzi, Annamaria Article Unravelling the Roots of the EMU Crisis. Structural Divides, Uneven Recoveries and Possible Ways Out Intereconomics Suggested Citation: Celi, Giuseppe; Guarascio, Dario; Simonazzi, Annamaria (2019) : Unravelling the Roots of the EMU Crisis. Structural Divides, Uneven Recoveries and Possible Ways Out, Intereconomics, ISSN 1613-964X, Springer, Heidelberg, Vol. 54, Iss. 1, pp. 23-30, http://dx.doi.org/10.1007/s10272-019-0786-3 This Version is available at: http://hdl.handle.net/10419/213192 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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Structural Divides, Uneven Recoveries and Possible Ways Out The process of European integration can be described as tive capabilities.1 It evolved from a pre-eminently political the increasing interdependence between economies at project to a ‘de-politicised’ management based on the different levels of development and with different produc- automatism of rules and on the assumption that market forces could promote convergence and harmonisation between and within countries. ‘Early liberalisation’ poli- Giuseppe Celi, University of Foggia, Italy. cies led to a ‘premature deindustrialisation’ – restructur- ing without industrialisation – which exposed the periph- Dario Guarascio, National Institute for the Analysis eral countries to stunted growth and persistent fragility of Public Policies (INAPP), Rome, Italy. with respect to external changes even before the forma- Annamaria Simonazzi, Sapienza University of 1 G. Celi, A. Ginzburg, D. Guarascio, A. Simonazzi: Crisis in Rome, Italy. the European Monetary Union: a core-periphery perspective, 2018, Routledge. ZBW – Leibniz Information Centre for Economics 23 Forum tion of the Monetary Union. The developments within and Figure 1 outside the euro area – emergence of the Central Euro- Growth of real GDP per capita – euro area and the US pean Manufacturing Core (CEMC),2 globalisation and ex- OECD data – constant prices (100 = 2000 values) ponential growth of low-cost competitors – put further percent pressure on the productive structure of peripheral coun- 125 tries. Germany’s growth model, based on wage modera- tion and reliance on exports, proved unsustainable for the 120 whole area. When the crisis fi nally exposed the mounting 115 disequilibria, austerity was relied upon to restore conver- 110 gence with severe consequences for the long-term viabil- USA Euro area ity of the Union. 105 100 Austerity policies carried out in both defi cit and surplus countries weakened growth and further increased ine- 95 quality and poverty, fed anxiety and resentment in credi- 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 tor and debtor countries alike, which in turn fueled anti- Year European sentiment and populist political movements Source: Authors’ elaboration on OECD data. across the entire European Union. The comparison of the growth rate in the euro area and the US illustrates the fail- ure of the Eurozone growth model (Figure 1). This paper integration that, though apparently neutral, generated briefl y reviews the factors responsible for the increasing increasing regional disparities both between the EMU divergence between and within the core and peripheral core and periphery and within countries themselves. countries of the EMU, describes the economic and politi- The structural crisis of the seventies (and the liberalisa- cal consequences of the crisis which began in 2008 and tion policies of the eighties) represented a turning point still grips the southern periphery, and discusses the pos- in the modalities of international competition. The crisis sible paths to a sustainable EMU. raised the standards of global competition and the satu- ration of demand for consumer durables shifted the fi eld At the root of the crisis of competition from price to product differentiation based on quality and innovation. While the countries of the core The crisis that began in 2008 has distant roots. In Celi et (epitomised by Germany) managed to adapt to the chang- al., we argue that the institutions of the EU and the EMU ing regime by innovating the industrial structure, the late- were based on the premise that all members were on a comer countries in Southern Europe struggled to adjust. level playing fi eld, excluding the ‘less modern’ (anti-com- Their premature deindustrialisation made peripheral petition) institutions, individual values and attitudes.3 The countries more fragile with respect to external change implicit assumption was that market forces, associated even before the inception of the euro. Thus, the different with institutions close to those assumed to be prevailing trajectories of peripheral and core countries refl ect the in- in ‘core’ countries, would create the ‘right’ environment terdependence between economies with different prod- for a sustained fl ow of investment and a smooth process uct capabilities. of convergence in the periphery. Two role models – Ger- man disinfl ation and US fi nancialisation– shaped the pro- The external imbalances are the more prominent evi- cess of European integration. The ‘German model’ made dence of the diverging pattern of the core and the periph- price stability the fundamental objective of the EMU and ery. A huge German current account surplus was coun- its Central Bank. The ‘US model’ commended wide- tered by equally large defi cits in the periphery. Various spread market liberalisation and states’ renunciation of factors have been indicated to explain these imbalances: economic and fi nancial interventionism. from wage moderation and off-shoring to Central-East- ern European countries, to the quality of German industry Because of these choices, the Southern peripheral coun- and its ability to penetrate high-growth markets.4 Wage tries (SP, hereafter) were exposed to macroeconomic and moderation, a traditional feature of the German labour industrial policy measures over decades of European model, was reinforced by the dualisation of its labour market. Since the mid-1990s, the share of low-paid work- 2 R. Stehrer, R. Stöllinger: The Central European Manufacturing Core: What is Driving Regional Production Sharing? No. 2014/15-02, 4 S. Danninger, F. Joutz: What explains Germany’s rebounding ex- 2015, FIW Research Reports. port market share?, in: CESifo Economic Studies, Vol. 54, No. 4, 2008, 3 G. Celi et al., op. cit. pp. 681-714. Intereconomics 2019 | 1 24 Forum Figure 2 The European trade network in 2008 Exports in billion dollars China 80.94 19.26 59.21 50.17 Euro (9) Germany 307.17290.55 550.98 69.87 58.93 22.60 3.78 139.36 471.68 937.76 53.84 735.83 131.06 13.04 554.77 349.67 144.07 132.93 ROW 143.87 252.84 EP 142.63 86.17 71.45 183.44 86.84 152.61 23.50 108.40 233.49 88.49 13.28 1,362.43 202.15 105.21 1,017.83 86.75 54.67 86.14 415.56 28.39 8.69 370.44 43.73 21.97 38.65 7.51 119.17 SP 115.32 France 48.36 35.11 32.34 29.95 USA Note: The arrows start from the surplus countries and point to the defi cit ones. The boxes report the value of exports (free-on-board) in billion dollars: the box above (or on the left) reports the value of surplus country’s exports and that one below (or on the right) includes the value of defi cit country’s exports (or, in other words, the free-on-board imports of the surplus country). Source: Authors’ elaboration on COMTRADE data. ers and working poors increase rapidly having a dual ef- and between-country inequalities produced asymmet- fect on the German trade surplus. By curbing the costs ric effects in the core and periphery. More specialised in of services, the real wage of ‘insiders’ increased (the capital goods, the core was able to offset the deteriora- workers employed in the export sector), supporting wage tion of income conditions of part of its population through moderation and export competitiveness. By reducing the imports of low price/low quality consumer goods. Con- level and the quality of imported consumption goods, versely, the SP, specialised in medium-high quality con- German imports were redirected away from the more ex- sumption goods, suffered a double displacement: i) the pensive, higher quality goods exported by Southern Eu- import penetration of low quality (Chinese) consumer ropean countries towards the cheaper goods exported goods in their internal and export markets, and ii) the neg- by China. This effect was compounded by the creation of ative effects on their exports deriving from the eastward the CEMC, which led to a partial crowding out of South- restructuring of German value chains. ern European suppliers (see Figures 2 and 3).