Who gained the most from the euro? And does it matter?

August 17, 2012

For almost a decade after the euro was introduced in 1999, the 17-member currency union enjoyed the benefits. Those in "peripheral" countries like Spain and Portugal were able to borrow money more cheaply to buy goods and build houses. Germany was able to export more stuff to the rest of the continent. Sure, once the financial crisis hit, the awkward structure of the euro zone turned out to be utterly calamitous. But for a spell, the good times were quite good.


Who's the big winner? (AP)

But who benefited the most from joining the euro? Over at FT Alphaville, Masa Serdarevic highlights a new report from UBS's Paul Donovan suggesting that peripheral countries like Greece, Portugal and Spain have done far better since joining the euro than core countries like Germany and France. That may explain why the core countries are now so reluctant to bail out their southern neighbors.

What the UBS report did was look at the growth in real disposable income between 2000 and 2010 across different income levels. Here are the results:

Some countries saw their living standards erode over the past decade — Austria, Germany, most of Italy, middle-income folks in France. On the other hand, poorer countries like Greece, Spain, and Portugal actually saw a large boost in real disposable income. These nations seemed to benefit disproportionately from the lower inflation that came with the euro. (Finland, oddly enough, is the one wealthy country that seemed to see its living standards rise over that period.)

As Serdarevic notes, "These are the sort of findings sure to play into the hands of the nationalist parties in the many of the core countries." Many German politicians keep asking why they should continue to spend money to support living standards in periphery countries like Greece when those periphery countries appear to have enjoyed most of the benefits from the euro zone in the first place. That said, it's worth noting that the periphery countries are still much worse off in relative terms. As the UBS report notes, "Someone occupying the bottom decile of French income distribution has twice the level of income of someone in the bottom decile of Greek income distribution in 2010."

Alternatively, though, core countries like Germany could set aside morality and fairness and just look at things from a practical standpoint. A new report (pdf) from ING analyst Mark Cliffe takes a look at what would happen if the core countries ended up kicking Greece out of the euro, as Austria's foreign minister now seems to be suggesting.

Cliffe finds that the remaining euro zone countries would probably take a hit of about 1.2 percent to 2 percent of GDP in the first year if Greece left. And that's a cheery, optimistic scenario — it assumes that a Greek exit doesn't trigger an uncontainable panic and a series of bank runs that force other periphery countries to exit. "Even if we set aside the possibility of a contagious and chaotic recession," Cliffe writes, "[euro zone] exits would crystallise enormous losses on the core countries’ exposure."

All told, the ING report concludes that "Fixing it may be cheaper than breaking it." In other words, the cost to fix the euro may be high (and rising). It may not be fair — as that graph from UBS suggests. But it may prove far less painful than the alternatives.

Related: From Krugmania to Draghia: Five ways to save the euro zone

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