The Strategist

IMF: The monetary union did not equalize the incomes of Europeans

01/30/2018 - 14:20

The economic and monetary union, as its architects expected, was to provide the EU with macroeconomic stability, GDP growth and equalization of the incomes of the population of rich and poor countries, lower interest rates, increase capital mobility and stimulate trade. However, real convergence of incomes did not happen, and forced unification of rates with a continuing gap in inflation and labor productivity resulted in negative consequences, the report of the International Monetary Fund (IMF) said.

Horia Varlan via flickr
Horia Varlan via flickr
Due to the renunciation of monetary sovereignty, the countries that signed the Maastricht Treaty of 1992 expected to lower the cost of borrowing and transactions, and provide greater freedom for trade, capital and labor, the IMF working report notes. However, despite the success of integration, many national governments were unable to implement the proper level of budgetary discipline and carry out the required structural reforms, which led to macroeconomic imbalances and increased productivity gaps within the union. The positive impact of mobility on trade and labor markets turned out to be weak. Transboundary capital flows, with low financial discipline, on the contrary, became a destabilizing factor.

It was expected that the level of prices for basic goods in the countries of the union would equalized, as is inflation, although with the proviso that it will remain higher in countries lagging behind in productivity and income of the population, as prices for non-trade goods will be unified more slowly. Nominal convergence of inflation and interest rates did occur immediately after the introduction of the euro, but the forced unification of low rates with a small but constant difference in inflation slowed the real alignment of economies: lagging countries with higher inflation lost competitiveness and growth opportunities. Inflows of capital to less developed countries increased cyclical fluctuations, increasing systemic risks and fixing the gap in labor productivity.

As a result, there was no real rapprochement between the "old" members of the monetary union. In Germany, for example, the size of GDP has already significantly exceeded the pre-crisis level, then it will return to its previous values no earlier than the mid-2020s in Italy. The growth of GDP and productivity did not lead to equalization of incomes of the population of rich and poor countries. Some leveling of unemployment was stopped by the financial crisis, which revealed centrifugal trends in the economy. However, in countries that joined the euro area later, unification, on the contrary, is faster.

The IMF calls the growing gap in real incomes a threat to social stability and cohesion. To overcome possible shocks and increase economic efficiency, a more vigorous policy will be needed. There have to be important steps, namely, creation of a banking union and the strengthening of the coordination of macroeconomic policies of countries. In addition, the EU needs to revise the budget rules to strengthen countercyclical policies and ensure revenue administration, and complete the formation of a banking union and capital markets union and carry out structural reforms to improve labor productivity. As national governments demonstrate little progress in this direction, greater coordination is required at the level of the euro area, the IMF concludes.

In fact, the Fund's recommendations fit into the framework of the road map for deepening the economic and monetary integration of the Union, developed by the European Commission: it provides for the creation of the European Monetary Fund and the introduction of the post of a pan-European Minister of Economy and Finance, strengthening fiscal discipline and supporting countries in carrying out structural reforms.