The quarter-century experiment in a common currency was supposed to have produced a Europe of rough equals, nations with comparable rates of productivity and competitiveness. Instead, the region’s economies now appear profoundly out of balance. A few are thriving, but others may be so far gone they need permanent subsidies.
That schism, as much as the debt and banking-sector problems troubling the region, is at the root of the current crisis and may prove the most difficult issue to overcome.
Politicians insist that with the right set of policies and a few years of bailout loans, “convergence” among the nations will still take place.
But studies by the European Central Bank, the International Monetary Fund and others have reinforced the notion of a euro zone fundamentally split between nations such as Germany that have navigated the new global system and those — potentially including France and Italy — that have steadily lost world market share.
“We have not seen some countries within the euro area maintain competitiveness,” Mahmood Pradhan, a deputy director of the IMF’s European department, said in a conference call last month on the euro zone.
Money did begin moving more freely after the countries adopted a common currency, removing the risk of fluctuating exchange rates. But it fueled what Pradhan referred to as “skewed development” — property bubbles in places such as Spain and Ireland — instead of investment that would produce sustainable long-term employment.
An earlier IMF paper found that the euro region’s southern tier — France included — was steadily losing out under the global trading system. A spring paper from the European Central Bank concluded bluntly that there was “no evidence” of convergence among the euro-zone countries in the critical area of labor productivity.
The issue is crucial to the euro’s long-run durability.
As currencies go, the euro and the nations that use it exist in a kind of halfway house. Its members are not fully integrated in the type of federal system that unites American states and are free to set many of their own economic policies, including budget and tax policies. Yet they have surrendered control over their money, interest rates, exchange rates and other monetary matters to a central authority that has to set a common policy for 17 nations.