Blog Post
25 Years of the Euro
Bretton Woods Committee
|
Thu, Mar 7, 2024
Body
The launch of the European Monetary Union (EMU) in 1999 signifies a turning point in international economics history and to this day serves as one of the most important events of the past century, bringing with it important economic, political, and social consequences for European companies and households.
Based on the economic convergence principle, monetary integration processes in Europe proved weak from the structural perspective, as witnessed in the impact of shocks that hit Europe over the past quarter of a century.
Although these shocks had symmetric impact, they resulted in asymmetric consequences for member countries of the Eurozone. The nominal convergence process did not determine a sustainable real convergence, while the Governance established in 1999 lacked necessary tools to successfully counter the dimension and nature of global shocks (including the Great Financial Crisis, coronavirus pandemic, and geo-political tensions).
25 years after the launch of EUR, durable convergence challenges in the Eurozone persist at high levels via economic performance across member states in recent quarters.
For instance, Germany’s economy (the largest in the Euroland, with a nominal dimension of over EUR 4.1tn) contracted by 0.3% YoY in 2023.
Private consumption and gross fixed capital formation adjusted by 0.7% YoY in 2023, given high levels of interest rates and persisting uncertainties.
On the other hand, the GDP of France (the second largest economy of the region) rose by 0.9% YoY in 2023 as private consumption and gross fixed capital formation climbed by YoY paces of 0.6% and 1.1%.
Furthermore, since the launch of the EUR, Europe’s role in the global economy has significantly declined while divergence compared to the USA economy has intensified.
According to statistics from the International Monetary Fund (IMF), the share of Euroland’s economy in the global economy declined from 22.4% in 1998 (the year before the launch of the EUR) to less than 15% in 2023.
This evolution was determined by both external factors (high economic growth paces in the emerging markets, especially in Asia) and regional aspects (including the persistence of weak productivity, in the context of rigidities, shortcomings in terms of integration, and delays in terms of implementing the Digital Revolution and the Artificial Intelligence Revolution).
At the same time, the GDP/capita of Euroland as a percentage of GDP/capita in USA declined from 64% in 1998 to 60% in 2022 (in constant prices, 2010 US dollars).
Several factors have determined this divergence between Euroland and United States, including slow dynamics of gross fixed capital formation in the region leading to persistent weak productivity and fragmentation of capital markets (in the absence of the Capital Markets Union, the cost of capital in Europe is higher).
Figures from the Bureau of Economic Analysis show an increase of gross fixed capital formation in the US by an average annual rate of 2.5% between 1998-2022. This is significantly higher compared to only 1.4% in Euroland.
Divergent dynamics in terms of labor productivity is one of the rationales behind the gap in terms of growth pace of fixed investments (Eurozone vs. USA). According to figures from the European Central Bank, labor productivity in Euroland barely grew between 1998 and 2022, while in USA this indicator advanced by an average annual pace of 2% during the same.
Alternately, the cost of capital in Euroland persisted at a high level compared to that in United States, given the fragmentation of financial markets on the continent, regarding delays in terms o implementation of the Capital Markets Union project. For instance, at the end of 2023 the gap of implied market risk premium between Germany and USA stood at 4.0pps.
Consequently, unemployment rates in Euroland have reached higher levels compared to those in the United States across recent decades, with the average annual gap being more than 3pps for the period 1999 – 2023, according to the figures of Eurostat and Bureau of Labor Statistics.
Additionally, the gap in terms of the YoY pace for potential output between USA and Euroland consolidated at around 1pp since the launch of EUR, according to the econometric estimates (by implementing the Hodrick-Prescott filter).
Taking all these considerations in account, there is cause to emphasize the importance of implementing the Political Union at the European Union level in order to consolidate the convergence among the member states. This is performed to support the role of Europe as a global actor as well as the role of EUR as a global currency in the mid-run.
In fact, the European Monetary Union is not complete without the Political Union, as reflected by traditional approaches of the Optimal Currency Area theory. According to the winter forecasts by the International Monetary Fund (IMF), the GDP of Euroland may increase YoY by 0.9% in 2024 and 1.7% in 2025, suggesting lower paces compared to the USA (2.1% and 1.7%, respectively).
Andrei Radulescu is a macroeconomist with post-university studies and professional experience in Portugal and Romania. He is also a Senior Researcher at the Institute for World Economy and Macro-Modeling Centre at the Romanian Academy. Radulescu joined the Bretton Woods Committee in 2023.
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25 Years of the Euro
Bretton Woods Committee | Thu, Mar 7, 2024
The launch of the European Monetary Union (EMU) in 1999 signifies a turning point in international economics history and to this day serves as one of the most important events of the past century, bringing with it important economic, political, and social consequences for European companies and households.
Based on the economic convergence principle, monetary integration processes in Europe proved weak from the structural perspective, as witnessed in the impact of shocks that hit Europe over the past quarter of a century.
Although these shocks had symmetric impact, they resulted in asymmetric consequences for member countries of the Eurozone. The nominal convergence process did not determine a sustainable real convergence, while the Governance established in 1999 lacked necessary tools to successfully counter the dimension and nature of global shocks (including the Great Financial Crisis, coronavirus pandemic, and geo-political tensions).
25 years after the launch of EUR, durable convergence challenges in the Eurozone persist at high levels via economic performance across member states in recent quarters.
For instance, Germany’s economy (the largest in the Euroland, with a nominal dimension of over EUR 4.1tn) contracted by 0.3% YoY in 2023.
Private consumption and gross fixed capital formation adjusted by 0.7% YoY in 2023, given high levels of interest rates and persisting uncertainties.
On the other hand, the GDP of France (the second largest economy of the region) rose by 0.9% YoY in 2023 as private consumption and gross fixed capital formation climbed by YoY paces of 0.6% and 1.1%.
Furthermore, since the launch of the EUR, Europe’s role in the global economy has significantly declined while divergence compared to the USA economy has intensified.
According to statistics from the International Monetary Fund (IMF), the share of Euroland’s economy in the global economy declined from 22.4% in 1998 (the year before the launch of the EUR) to less than 15% in 2023.
This evolution was determined by both external factors (high economic growth paces in the emerging markets, especially in Asia) and regional aspects (including the persistence of weak productivity, in the context of rigidities, shortcomings in terms of integration, and delays in terms of implementing the Digital Revolution and the Artificial Intelligence Revolution).
At the same time, the GDP/capita of Euroland as a percentage of GDP/capita in USA declined from 64% in 1998 to 60% in 2022 (in constant prices, 2010 US dollars).
Several factors have determined this divergence between Euroland and United States, including slow dynamics of gross fixed capital formation in the region leading to persistent weak productivity and fragmentation of capital markets (in the absence of the Capital Markets Union, the cost of capital in Europe is higher).
Figures from the Bureau of Economic Analysis show an increase of gross fixed capital formation in the US by an average annual rate of 2.5% between 1998-2022. This is significantly higher compared to only 1.4% in Euroland.
Divergent dynamics in terms of labor productivity is one of the rationales behind the gap in terms of growth pace of fixed investments (Eurozone vs. USA). According to figures from the European Central Bank, labor productivity in Euroland barely grew between 1998 and 2022, while in USA this indicator advanced by an average annual pace of 2% during the same.
Alternately, the cost of capital in Euroland persisted at a high level compared to that in United States, given the fragmentation of financial markets on the continent, regarding delays in terms o implementation of the Capital Markets Union project. For instance, at the end of 2023 the gap of implied market risk premium between Germany and USA stood at 4.0pps.
Consequently, unemployment rates in Euroland have reached higher levels compared to those in the United States across recent decades, with the average annual gap being more than 3pps for the period 1999 – 2023, according to the figures of Eurostat and Bureau of Labor Statistics.
Additionally, the gap in terms of the YoY pace for potential output between USA and Euroland consolidated at around 1pp since the launch of EUR, according to the econometric estimates (by implementing the Hodrick-Prescott filter).
Taking all these considerations in account, there is cause to emphasize the importance of implementing the Political Union at the European Union level in order to consolidate the convergence among the member states. This is performed to support the role of Europe as a global actor as well as the role of EUR as a global currency in the mid-run.
In fact, the European Monetary Union is not complete without the Political Union, as reflected by traditional approaches of the Optimal Currency Area theory. According to the winter forecasts by the International Monetary Fund (IMF), the GDP of Euroland may increase YoY by 0.9% in 2024 and 1.7% in 2025, suggesting lower paces compared to the USA (2.1% and 1.7%, respectively).
Andrei Radulescu is a macroeconomist with post-university studies and professional experience in Portugal and Romania. He is also a Senior Researcher at the Institute for World Economy and Macro-Modeling Centre at the Romanian Academy. Radulescu joined the Bretton Woods Committee in 2023.