The Euro is no cure-all

When the euro was introduced in 1999, critics warned that it would cause economic problems because individual countries could not tailor their monetary policy to fit their own problems. According to the Economist magazine, this is exactly what has happened over the past five years.

For example:

Since the single currency was born in 1999, Italian labour costs have risen by about 20 per cent relative to Germany, because German firms are much more effective at controlling wages and boosting productivity.

While German exports have risen steadily, Italy’s are struggling – and the Italian economy is the slowest-growing of the big countries in the euro-area.

If Italy had its own currency, devaluation would be a way to restore competitiveness, but that is impossible in the monetary union.

Some European Union economists argue that only a horrific recession – involving massive bankruptcies and cuts in nominal wages – can now restore Italian competitiveness.

Spain, Portugal, Greece and Ireland all face similar challenges. Nor is Germany succeeding under the monetary union. Germany is suffering because the Europe-wide interest rate is too high for the German economy. Consequently, relatively high interest rates are squelching domestic demand and economic growth, says the Economist.

Source: The euro is no cure-all, Economist, April 30, 2005.

For text (subscription required): http://www.economist.com/research/articlesBySubject/displayStory.cfm?subjectid=348930&story_id=3910270

For more on International: Currency Issues: http://www.ncpa.org/pi/internat/intdex1.html

FMF Policy Bulletin/ 14 June 2005