With the decision of the European Council at the end of June 2012 – which launches the Banking Union and the State-saving Fund – the spread is no longer the thermometer of a country's permanence in the Euro, but of the survival of the ECB. It is the future of the Euro – and therefore above all its benefits – that must be evaluated. It is good to go back to considering the fundamentals, also because the economic recovery of the Eurozone makes obsolete the academic debate of the last three years on austerity-that-hurts).
To reason correctly on the net benefits of the Euro we must remember some fundamentals (which are sometimes forgotten, even if they have been well explained for many years in the main university textbooks, such as De Grauwe and Baldwin – Wyplosz).
The fundamentals of the Euro
1. The Euro was born - and for now remains - an "incomplete monetary union": the member countries are united only by the currency, without other common policies (in particular the budgetary one).
History reminds us that all “incomplete” monetary unions disappeared sooner or later. In other words, it either proceeds with successive integrations, including political ones, or it fails.
2. Not only history, but also economic science teaches that an "incomplete" monetary union is a particularly fragile, in the presence of “asymmetric shocks” (which have divergent effects on member countries). The only policy available – the ECB's monetary policy – is not suitable, precisely because it is “good on average”, to solve problems due to the increased variance between member countries.
3 I net benefits (i.e. benefits greater than costs) of being part of a monetary union depend on a series of conditions (which in the scientific literature correspond to the different analyzes of: Mundell, McKinnon, and Kenen), which should be satisfied prima di become part of a Union, or which could also be achieved later, with the appropriate reforms.
4. The benefits are essentially attributable to the greater growth that derives from integration with other economies (integration that generates specialization in one's own relative virtues; economies of scale and scope; and so on), while the costs derive from the renunciation of past productions and consequent economic and social difficulties of adaptation. It is therefore clear that the net benefits are all the more probable (and greater) the better the market (the competition) which stimulates and selects; be the welfare (solidarity); be there cooperation (the coordination) of the other policies of national governments.
5. Since the benefits accumulate over time while the greatest costs occur mainly at the beginning, the profile of the net benefits is increasing over time. Also for this reason, the Union is to be understood as "indissoluble": a temporary union or one from which one can leave and re-enter does not give any benefit.
The first 15 years
The Union which began on 1 January 1999 has not always taken into account those five fundamental principles. For a number of reasons: each country has not carefully checked its conditions of success; the necessary reforms and policies have not been made; and even in conditions of serious crisis (after 2009) the indispensable "cooperative games" of Governments have not been seen. But two structural aspects – which emerged clearly only with the crisis of the last three years – had been underestimated right from the start.
1) First of all, the theory of "optimal monetary unions" is based on the capacity of the competition – that is, the selection made by a good market – to produce its benefits. Not surprisingly, it is a theory entirely developed by American economists, that is, of a culture opposite to the European one in terms of trust in the beneficial capacities of the market and competition. And what is true for the economy is even more true for society. Not surprisingly, we Europeans speak of a "social market economy", which makes more sense in German than in English!
The sector where competition is more free to act is that of industry. In fact, it is in this sector that today in the Eurozone we see the results of the selection made also thanks to the common currency. And the benefits go directly to the companies that have been able (or have been able) to adapt to what is required by this integration process How selection. The European "internal market", the quality of which would have been improved by the common currency, ... still doesn't exist!
2) But even the Monetary Union, even if incomplete, ... still doesn't exist! In fact, with the crisis we discovered (but we should have known, see Terzi-Vaciago "Euro, banks and financial structure", Italian Society of Economists, 1999) that the only truly common currency was only the circulating currency (banknotes and coins), i.e. the money of the central bank, and not also that of the banks. The "renationalization of the banking system" of recent years risked being the beginning of the end. Hence the priority – shared by all the Governments – to implement, starting from this year, the banking union.
Better late than never!
Conclusions: German Euro?
Over the years, we've all enjoyed having our say about Germany. On Monday we are afraid of it; on Tuesdays we blame her for our mistakes; on Wednesdays we let her know what we are best at; on Thursday we ask you to do more; on Fridays we hold Auschwitz against her; on the weekend we rest, … and then we start again.
It would be more serious, and politically useful, if in the next few years we could all decide what we intend to do together with Germany: we already share the same currency; can we also get the clear benefits in terms of employment and income growth?
From the Circolo Ref Ricerche website
