The Euro Disaster

By Jörg Bibow and Heiner Flassbeck (1)

The European Economic and Monetary Union (EMU) has been in permanent crisis since 2008. Not all member states are equally affected – rather, a major imbalance is the result of unequal economic development and poses a particular threat to the continued existence of monetary union.

The four major euro countries Germany, France, Italy, and Spain have also experienced very different developments under the euro, in particular since the outbreak of permanent financial crisis from 2008.

Figure 1, the economic development of the four major Euro nations in the euro zone shows the economic development of the four large euro-zone states seen in relation to the base year 2008: since 2008, Germany has stood out as a country with supposedly strong development within this group. Indeed it has been the front runner – even though the slump in 2009 was particularly profound in Germany.

France, on the other hand, has seen very little growth since the crisis. The situation in the two largest countries of monetary union has thus reversed: before the crisis Germany was long regarded as a “sick man” of Europe, achieving only very brief phases of growth from 1999 to 2000 and from 2006 to 2007. France initially recorded a very steady and much more robust development under the euro. In Italy, which had experienced poor development like Germany’s before the crisis, the situation has since deteriorated dramatically. It seems to have fallen into a trap from which it cannot escape.

Spain experienced rapid ups and downs: first a long boom, then a sudden collapse, which, as in Italy, took place during a double recession. For a few years now, the country in the southwest of the euro zone has been showing a comparatively strong development in terms of official GDP figures. However, unemployment remains very high.

It is therefore not surprising that Germany is now generally praised by the media and in politics as a paragon and role model among the large euro member states, while France and Italy, according to official interpretation, have not done adopted the “necessary policies” and seem to be making no progress. The supposedly neglected homework is of course “structural reform”. That term refers to the urgently needed liberalisation of the labour market and a reduction in the role of the state, which are purportedly indispensable to restoring competitiveness. Even the global financial crisis from 2007 to 2009 and the still unresolved euro crisis since 2009 have not been able to inspire economic policymakers to think and reflect. Europe remains unwaveringly committed to neo-liberalism.

From this point of view, France and Italy stand in the way of their own happiness, because they refuse to take their medicine: the miraculous healing power of the market. Today, this mantra is incessantly repeated by supposedly knowledgeable pundits and subsequently repeated ad nauseam by the media. The following quote from François Villeroy de Galhau, governor of the Banque de France, expresses perfectly the core hypothesis of continued economic weakness due to delayed structural reforms:

“Twenty-five years ago, we spoke of an ‘Economic and Monetary Union’. Since then, we have made a success of monetary union, but we have not been very effective with regard to economic union. The rather good economic performance in the euro area on average still conceals individual heterogeneities. And so, first and foremost, some countries, like France and Italy, need to accelerate domestic structural reforms to improve the functioning and flexibility of their economies. And let me be clear, it is in our national interest: we currently have lower economic growth and employment than some of our neighbours, such as Germany, Spain and the Netherlands, which have succeeded in carrying out the necessary reforms.”

The hypothesis of persistent economic weakness due to postponed structural reforms is, of course, in line with the usual superstition of mainstream economic theory, according to which markets must be freed from all “rigidities”, because they would then – always and everywhere – enable the fastest growth and maximum general happiness. If some economies grow faster than others, this is due to the structural reforms they have successfully implemented. If economies grow at a slower pace, this is due solely to the fact that they have still not implemented urgent structural reforms.

The intellectual simplicity of this view of the world is impressive, and it appeals to those who, perhaps with an eye to political opportunism, simply want to join the neo-liberal herd. But before we explain an alternative, let us first review the current situation and some historical developments in the four large euro member states.

Figure 2, the economic development of the four major euro nations in the neo-liberal era shows the economic development of the four major euro member states since 1980, compared with the base year 1999, the year in which the euro was introduced. Every ten years, for example, there was a recession, but otherwise there were quite similar developments in Germany, France and Italy in the 1980s and 1990s.

Germany experienced a brief acceleration of growth in the years around German unification; but France caught up again in the course of the 1990s. All in all, Italy’s development during this period was only slightly slower than that of Germany and France. Spain, on the other hand, having only joined the European Community in 1986 was successfully catching-up, experiencing a prolonged upswing until 2009. The acceleration in Spanish growth that began in the mid-1980s, apart from the recession in the early 1990s, was maintained until the great financial crisis. For Germany and France as a whole, the trend is almost parallel for the period following the introduction of the euro: Germany was paralysed before the great crisis, and France has been paralysed ever since. In the case of Spain, optimistic observers are now hoping for a resumption of the catching-up process, which may have been interrupted by the deep financial crisis; while Italy appears to have been stranded on the side-lines under the euro, as is clearly visible here once again.

Figure 3. The development of pro capita earnings: Recovery process and convergence.

The development of per capita income (in purchasing power-adjusted estimates by the IMF), which can be seen in Figure 3 for the period since 1980, also shows that Germany had a slight lead of around five percent by 2005 among the three old member states, while Spain for a while was able to significantly reduce its much larger deficit. Since the great financial crisis, Italy in particular has lost ground enormously to Germany and is now on a par with Spain. But Spain and even France have also fallen back noticeably since then. It is therefore easy to see why Germany is generally perceived as the winner of the euro and the euro crisis and why the rest of Europe are seen as losers.

The critical economic divide within the euro zone is also reflected in the labour market situation (Figure 4): In Germany, the unemployment rate today is as low as it was before the recession of the early 1980s, or even lower than it was during the “unification boom”. In the other three countries, on the other hand, negative historical records are still being set. In France and Italy, the unemployment rate has fallen only slightly in recent years. In Spain it has fallen more sharply, but from an extremely high level. Germany has traditionally had a lower unemployment rate than the other three countries, which was different only in the nineties until the great financial crisis. At that time, unemployment in Germany rose against the trend in the rest of the euro zone and exceeded the level in the other three major euro states. Why was Germany having difficulties in this period? How has Germany, like a phoenix, been able to rise from the ashes – while other euro countries, and the euro zone as a whole, have not yet emerged from the crisis?

Figure 4. The development of unemployment since 1980 in the major euro economies

The unusually poor economic development in the euro zone is particularly evident in comparison with other developed countries, especially when examining the development of domestic demand since the great financial crisis of 2009 (Figure 5). Although the major developed economies mostly failed to develop satisfactorily after the global crisis, the euro zone is far behind and is the international laggard. According to official figures the euro zone failed to return to pre-crisis levels of domestic demand until 2016.

Figure 5. Domestic demand development – the Eurozone far behind by international standards

The picture of the overall situation is unambiguous and cannot be convincingly ignored: the euro zone’s economic policy has obviously failed. Indeed, if the euro was conceived as a means of organising and securing common prosperity in Europe, it has certainly failed. In fact, political and social instability in almost all member states has reached a level that makes a total break-up of EMU seem a real possibility. It is therefore no exaggeration to speak of the EU as being in “existential crisis”. Wolfgang Münchau has formulated this appropriately bluntly with reference to the main culprits (Financial Times, 27 March 2017):

“Failure to overcome the euro-zone crisis is one of the great historical mistakes of post-war Europe – the legacy of Angela Merkel, Nicolas Sarkozy, François Hollande and all those who played a role in this political disaster. It is one of the main reasons for the rise of populism. It made us all vulnerable to additional shocks. The departure of a single country from the euro zone would unleash a financial crisis of unimaginable proportions.”

Germany’s economic policies are primarily responsible for driving the Eurozone into its still unresolved existential crisis. It is ironic that Germany, after wrecking EMU with its peculiar “beggar-thy-neighbour” policies, continues to call the shots and hinders proper recovery of its partners. The Eurozone does indeed need structural reforms. But the urgently needed reforms concern macroeconomic policies and institutions rather than pushing Europe ever further into the neoliberal purgatory. The neoliberal agenda of starving the state in the name of austerity and impoverishing employees in the name of flexibility and competitiveness can only succeed in destroying what responsible political leaders have been trying to build in Europe since the Second World War.

(1) Jörg Bibow is professor of Economics at Skidmore College.

Jörg Bibow und Heiner Flassbeck have just published a book on this topic (in German): Das Euro-Desaster. Wie deutsche Wirtschaftspolitik die Eurozone in den Abgrund treibt. Westend Verlag, 224 Seiten, 20 Euro.

This article has also been published in Makroskop and Brave New Europe.