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2017 | OriginalPaper | Buchkapitel

2. The European Monetary Union and OCA Theories: A Common Currency Awaiting a Real Economic Union

verfasst von : Enrico Marelli, Marcello Signorelli

Erschienen in: Europe and the Euro

Verlag: Springer International Publishing

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Abstract

After a brief description of the functioning of the European Monetary System and its crisis, this chapter analyses the objectives and content of the Maastricht Treaty, including the convergence criteria for admission to the Economic and Monetary Union (EMU). The judgment on the EMU’s construction is made by considering the Optimal Currency Area theories. The chapter also includes an account of empirical evidence on ‘real convergence’ – which is juxtaposed to ‘nominal’ and ‘institutional’ convergence – in the Eurozone, compared with the European Union as a whole. The empirical investigation is completed by analysing cycle correlations, sensitivity to the average EU cycle and trade intensity.

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Vorheriges Kapitel A Progressively Integrated European Community within the Global Economy

Nächstes Kapitel Monetary Policy and the European Central Bank: A Progressive Divorce from the Bundesbank Legacy?

In particular, during the 1960s the amount of US dollars became much higher than the value of the gold reserves held by the FED.

The value of the ECU (European currency unit) with respect to a given currency, for instance the German mark, was given by a weighted average of bilateral exchange rates of the various currencies relative to the German mark.

Most of them referred to weak currencies like the Italian lira, which was progressively devalued relative to the German mark, because inflation in Italy was double, or more, that in Germany.

In a way, the centrality of Germany in deciding the monetary policy for all participating countries was greater during the EMS than in the current EMU, since now all countries have (formally) the same role in deciding the common monetary policy (see Chap. 3).

The justification for nominal convergence criteria has been critically assessed by many authors (e.g. Buiter 2004; De Grauwe and Schnabl 2005). In particular, the excessive insistence on fiscal conditions was immediately criticized (Buiter et al. 1993).

At that time, the EU included 15 members. The ‘opting-out clause’ was granted to the United Kingdom; a similar one to Denmark (after the negative outcome of the 1992 referendum); Sweden never applied to join the EMS. Hence, the only country really excluded was Greece.

Note, however, that outside monetary unions the exchange-rate manoeuvre is not always really effective. For instance, a devaluation improves the value of the trade balance only if some conditions are satisfied (Marshall–Lerner conditions, pass-through mechanism, J-curve hypothesis, etc.). In particular, a devaluation of the national currency can have a positive effect only in the medium run, because in the long run the vicious circle between devaluation and inflation will cause further losses of competitiveness, without any permanent real benefits.

Provided the conditions spelled out in footnote 7 are satisfied.

For a review of the literature on the relationship between European economic and monetary integration and the Optimal Currency Area theory, see Mongelli (2008). In addition, for a theoretical discussion of the economics of the monetary union (starting from an OCA’s approach), also including the Eurozone crisis, see Sanchis i Marco (2014).

For a more recent assessment, see Krugman (2012a). Note, however, that although Krugman’s hypothesis is more plausible for the manufacturing industry (especially in some sectors), nowadays services account for about 70 or 80% of GDP and are much more similar across countries.

In particular, the hope for formerly ‘deviating’ countries was that they could be rewarded by the gains of the EMU: disinflation and financial stability, lower interest rates and debt service. On the other hand, those countries could be punished – by means of strict nominal criteria – for their previous ‘vices’: undisciplined public finances, inflation-prone behaviour, etc., and the ultimate threat of being left out of the EMU.

See the review in Marelli and Signorelli (2010b), where the connections between real convergence, nominal convergence and institutional convergence are investigated.

It is interesting to note that in the 1990s the European ‘core’ was assumed to include Germany, France and the Netherlands (with the addition of Belgium and Luxembourg); after the sovereign debt crisis (2011–2012), Austria and Finland joined Germany and the Netherlands as the ‘toughest’ core countries of the Eurozone (with France in a middle position between Germany and the ‘PIIGS’: see Chap. 5).

The number of foreign-born residents in each EU country is also increasing over time; in particular, the ‘push’ factors from origin countries played a crucial role in the crisis period. Labour out-migration concerned increasingly high-skilled workers, who frequently migrate to occupy medium or low skilled jobs in the core countries of the EU.

This feature of the US institutions together with the characteristics of the economic system – price and wage flexibility, labour mobility – are enough to completely offset the heterogeneity of productive structures of the US states; in other words, asymmetric shocks are likely also in the United States, but there are significant private and public adjustment mechanisms.

German competitiveness benefited both from productivity increases and from wage moderation, especially following the Hartz reforms (2003–2005).

As a consequence, by 2007, Germany was net lending almost 200 billion euros per year to other Eurozone countries, while Spain was the largest net borrower by about 100 billion euros. The Eurozone’s current account as a whole was in balance before the crisis and remained close to balance throughout. See Baldwin and Giavazzi (2015b), Berger and Nitsch (2010). Some authors have also emphasized a possible link between persistent external imbalances and the sovereign debt risk (Giavazzi and Spaventa 2010; Beker and Moro 2016).

For instance, Pasimeni (2014) focuses on factors mobility (capital and labour); price and wage flexibility; similarity of business cycles and common fiscal capacity (as a mechanism of shock absorption and risk sharing).

A recent analysis comparing the Eurozone members and other EU countries can be found in Marelli and Signorelli (2015); in addition to per capita GDP, other real variables (e.g. unemployment) and also nominal variables (interest expenditure, deficit/GDP, debt/GDP, etc.) were considered.

Although the new members of the Eurozone entered gradually from 2007 to 2015, they had to satisfy the requirement of fixed exchange rates (with the euro) for at least 2 years before entering, but many of them had opted for fixed exchange rates even before that. Thus, we can consider them all as Eurozone members for the crisis period. EZ11 refers to the 11 members in 1999 (Greece entered 2 years later but with great difficulties in respecting public deficit and other convergence criteria).

In another recent study, limited evidence of absolute convergence has also been found by López-Tamayo et al. (2014), although conditional convergence turns out to be more robust; this study is also interesting because it considers several indicators of institutional, social and macroeconomic conditions.

This outcome is not uncommon. Monfort et al. (2013), by analysing beta convergence in terms of productivity, detected in the EU’s two convergence clubs, which are not related to the fact that some countries belong to the euro area.

However, this result is not very robust; in fact, if we consider the 1999–2007 period (characterized by a lot of missing data), the coefficient is still positive, but not significant.

The lack of ‘real convergence’ in per capita incomes in the Eurozone is consistent with the prevailing ‘structural divergence’ detected by other authors (Buti and Turrini 2015); at the same time, there was a clear ‘nominal convergence’ (as discussed in the previous section).

Some studies had previously detected the positive impact on cycle correlation of the euro’s introduction. Gonçalves et al. (2009) found that business cycles correlation increased more among Eurozone members after the implementation of the euro than among other OECD economies.

Some studies have focused on synchronization of business cycles (rather than on simple correlations). For example, Soares (2011), using a particular technique, found that France and Germany are the countries most synchronized with the rest of Europe, thus representing the ‘core’ of the Eurozone.

Due to lack of Eurostat data, for three countries (Ireland, Romania and Slovakia) we used the non-seasonally adjusted data (thus their correlation coefficients should be considered apart).

This is a surprise, since this figure is even greater than Germany’s 0.820 coefficient.

In this case, the tiny size of its economy probably matters; furthermore, its growing specialization in financial services makes its cycle different from the one of the industrial countries. In the first, period the lowest coefficients are found in Austria and Portugal.

The only country with a low coefficient is Poland (0.322); it is known that the economic cycle has been positive in this country also in the crisis period. As for the remaining three countries in Table 2.3, consider the negative correlation exhibited by Ireland in the crisis period.

This was found by computing the bilateral correlations only on the business cycles component (obtained by applying a HP-filter) of GDP growth.

This benchmark refers to an empirical investigation focused on the European regions; in the case of States, it is probably higher, but since in the EU there are many tiny States (Luxembourg, Malta, the Baltic States, etc.) it is wise to keep the same 20% benchmark.

As to the absolute values of the ratios, they depend, first of all, on the overall ‘degree of openness’ of the countries; this is why small countries exhibit high ratios and big countries (including Germany, France, the United Kingdom and Italy) present rather small ratios. However, since we are considering ‘intra-EU’ trade, some other elements take on importance such as sectoral specialization, geographical location and historical connections. In fact, Cyprus and Greece have the lowest ratios among all countries. On the contrary, it seems that the use of a common currency (the euro) is not important for determining trade integration.

Moreover, Mendonça et al. (2011) found in the case of the Eurozone a positive effect of trade intensity on business cycle correlation, but the marginal effect has been decreasing.

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Titel: The European Monetary Union and OCA Theories: A Common Currency Awaiting a Real Economic Union
verfasst von: Enrico Marelli
Marcello Signorelli
Verlag: Springer International Publishing
Buch: Europe and the Euro
Print ISBN: 978-3-319-45728-4

Electronic ISBN: 978-3-319-45729-1

Copyright-Jahr: 2017
DOI: https://doi.org/10.1007/978-3-319-45729-1_2