The euro, long-run convergence and the impact of the crises

In this paper we review the double crisis that affected the euro area in the recent period. The objective is to show both the original weaknesses of the Economic and Monetary Union’s construction and the negative consequences of the excessive austerity measures that have been undertaken in the area, especially in the peripheral countries hurt by the sovereign debt crisis; not only have such measures caused a deep recession but they are likely to lead to a stagnation with persistent unemployment.

In the first part of the paper, we examine the initial fragility in the construction of the European monetary union, especially because of the emphasis placed on nominal convergence criteria, without taking into account the need for real convergence. This argument is corroborated by some econometric investigations based on sigma and beta convergence – concerning both the EU and the Eurozone – for different macroeconomic variables, distinguishing between the pre-crisis period, 1999-2007, and the recent 2008-2013 period. The empirical section continues with an examination of recent macroeconomic trends focusing on economic growth and unemployment: it stresses that the deep and prolonged recession can be defeated only through adequate demand management policies. The next section explains how the excessive austerity policies recently carried out have also been caused by incorrect assumptions about the size of the fiscal multipliers.

The final policy section emphasizes three aspects: (i) the radical reforms in the EU governance and structure necessary if the monetary union is to survive; (ii) the changes in macroeconomic policies required to put an end to the present stagnation; (iii) the different and innovative policies needed to fight the high level of unemployment (especially youth unemployment).