(Some thoughts about the long term dynamic forces in the EMU)
(Abstract)
Antonin Rusek
Susquehanna University, Selinsgrove, PA 17870
Objective: The objective of this paper is to analyze the long term dynamics of major economic indicators between the individual Eurozone countries. It is today increasingly recognized that the divergences between the Eurozone members are at the root of the current crisis. But the dynamics of basic indicators during the common currency existence is seldom analyzed and compared, especially as far as fiscal, financial and competitiveness variables are concerned. This paper aims to contribute to filling this gap.
Background: The frequency and nature of shocks impacting the individual countries is the one of major factors determining the success of a monetary union. Starting with the seminal work of Robert Mundell (1961), economic writers analyzed varying roles symmetric and asymmetric shocks played in the optimality and a success of currency unions both theoretically and practically.
However, it is equally important for the success of a monetary union to analyze the longer term trends. This is especially so in the organization like EMU (Eurozone), where the monetary centralization operates in the environment of decentralized fiscal structures, no fiscal transfers between the participating entities (independent states) to speak of and very limited labor mobility.
In such an environment, the diverging trends between the participating entities (states) are unlikely to be compensated for by an induced factor movements and/or structural changes (not to mention fiscal transfers etc.), as happens in the similar dynamics within the centralized political entities (individual states).
Political response to the diverging trends (if such trends can be identified) is difficult to predict. On the extreme poles two responses are possible. On the one side radical structural reforms can be attempted to obtain the convergence processes, perhaps accompanied by an increase of both interstate fiscal transfers and (to a degree) political centralization in the decision making processes of EMU. On the other side the EMU in its current form can disintegrate. But, indeed, many “in between” results are certainly imaginable.
Method and Data: This paper endeavors to investigate the dynamics of basic macroeconomic variables in the EMU, looking both at general dynamics (GDP, inflation, unemployment), the fiscal and financial issues and competitiveness. This dynamics is then evaluated against both the stability of the EMU as an institution but against the future challenges as well.
Expected Results: At its first 11 years of existence, the Eurozone was a reasonably cohesive economic arrangement as far as variables like GDP, inflation and employment are concerned. However, significant and rising divergences developed developing in the areas most important for the long run economic performances of individual countries – productivity, competitiveness, financial and fiscal stability. As recent developments demonstrated, unless addressed, these divergent trends may constitute significant, and perhaps ultimate, threats to Eurozone cohesion and perhaps to its existence.