BarcelonaOn New Year’s Day 2002, the images were repeated in all the media in Europe: excited citizens withdrew the first euros from ATMs. The euro was in circulation and, in the eyes of the people, it was definitely a new reality that further strengthened the economic ties of eleven countries – currently 19 – of the European Union. Europeans, and among them Spanish citizens, have been carrying euros in their pockets for two decades, even though it has been established in banking and accounting since January 1, 1999.
Among the citizens, the illusion was mixed with the resignation of having to get used to a new currency, while in the Spanish political and business establishment the euro was received with euphoria. The then president of the Spanish government, José María Aznar, spoke of the realization of “a dream” and the political parties, with very few exceptions, joined the celebrations. Twenty years later, however, the dream can be figured out: Spain, like the countries of the western Mediterranean and Greece, is among the least benefited in terms of growth.
In fact, the general joy of that 2002 contrasted with the criticism of economists. Economic theory has well studied the workings of what is called a optimal monetary area and experts of all colors – including several Nobel laureates – pointed out from the outset that the countries that shared the euro did not meet the minimum requirements for economic and political integration. In other words, they warned that the EU was building the house on the roof by promoting a single currency without having a well-unified economic policy.
The general joy with the birth of the euro contrasted with the criticism of economists
The United States, Switzerland and the United Kingdom have shown that an optimal monetary area can be created despite having both great cultural diversity and strong political decentralization. But the main difference between these countries and the eurozone is on a fiscal scale: they have a central or federal government that collects taxes and then spends them all over the territory, offsetting the capabilities and needs of each region.
If California is more competitive than Texas, Texas citizens will import California products, but at the same time the U.S. government will also collect more taxes from Californians and spend more on Texas. Thus, the money coming out of Texas to California will be returned, in part, thanks to federal government transfers. The euro area has no similar mechanism, as the EU budget barely exceeds 1% of its gross domestic product (GDP, the indicator that measures economic activity). With the euro, if Spain imports a lot from Germany, a priori there is no way to get the money back.
The theoretical solution to this problem was to force all the governments of the euro countries to limit their debt, all equally. The reality is that this mechanism does not establish a system of transfers between territories and also prevents less competitive states from being able to use debt to finance investments and thus gain competitiveness.
One way to deal with this would be for the European Central Bank to finance the debt of states by buying bonds – economists say. lender of last resort, a fact considered anathema by the first two presidents of the institution, Wim Duisenberg and Jean-Claude Trichet. In its beginnings, the ECB followed the German monetary tradition to the letter – as opposed to that of the Anglo-Saxon countries – which does not accept the acquisition of debt by central banks as a valid policy, as the creation of money for helping the government can drive up prices.
Recession in the center, bubbles in the south
The beginnings of the eurozone were marked by a recession in France and Germany. The ECB had to adjust its policy to help the continent’s two engines and lower interest rates, while the European Commission turned a blind eye when the governments of these countries systematically breached their treaties and went into debt. on the permitted. Such low interest rates served to boost the German economy, but led to strong growth and price increases in more peripheral states, such as Spain or Italy, which would have needed higher rates. Inflation in particular led to the loss of competitiveness of these countries, as their products became more expensive than those of the central states of the continent. “Peripheral countries grew more than Germany in the first years”, among other reasons “thanks to the sharp reduction in interest rates”, explains Jordi Galí, professor of economics at UPF and researcher at the Center for Research in International Economics of this university.
Rates that are too low for Spain explain two phenomena in the early 2000s. The first is the sharp rise in prices, which many citizens mistakenly attributed to the decision of traders to round prices. The second, the lowering of credit, which caused the housing bubble: it was the time when everyone had a mortgage. Both are the result of an overheating of the economy caused by too lax ECB policies. “A well – managed monetary policy could have stopped the excessive growth of the 2000s and prevented differential inflation [respecte a Alemanya] and the loss of competitiveness, “says Galí.
But with the outbreak of the financial crisis in 2008, the situation was reversed: the periphery suffered more from the recession than the states at the heart of Europe. And on this occasion, the European Commission did not turn a blind eye and imposed unprecedented austerity on governments at a time when countries such as Spain, Italy and Greece needed the public sector to increase spending to offset the fall in activity. The ECB, for its part, lowered entry rates, but raised them in 2011, in the midst of a crisis. The recession lasted much longer in Europe than in the rest of the world and had a very negative impact on the peripheral states, several of which – Spain among them – ended up being rescued. In 2009, the US was already growing again, while in Greece or Spain there were still five years of hardship ahead.
“The exit from the recession to the periphery would have been faster with its own policy and currency, as it was in the early 1990s,” said Galí. “But I am not clear that the price stability that the ECB has achieved would have been achieved, as peripheral central banks would not be as credible in their willingness to control inflation,” he added.
Integration in recent years
The crisis and then the covid have served to further integrate the eurozone. In fact, the crisis ended when in 2015 the new President of the ECB, Mario Draghi, broke the debt taboo and began the massive purchase of government bonds, which gave stability to markets and room for maneuver for governments. with problems, including Spanish, to borrow at a lower cost. With the pandemic, it has gone a step further, with the issuance of European bonds funded by the EU budget, which brings the European Commission a little closer to the role of federal government, although it is still far from collecting taxes. Next Generation funds, while a one-time program, are also a precedent for having a system for transferring money from rich and competitive countries from the center to the periphery, also emulating the role that a hypothetical European government would play.
NextGen’s community debt financing is a major qualitative leap forward. ”
Jordi Galí
Can you go further? “It’s a purely political issue. It’s up to the states to come to an agreement for a more flexible arrangement, and I think they will adopt it,” Galí said. For the economist, “precovid architecture, forged during the debt crisis with the aim of calming peripheral debt markets, is obsolete and no longer has any credibility.” “NextGen’s Community debt financing is a major qualitative leap that could become the embryo of a pan-European fiscal policy,” he added. But, he points out, “the optimal architecture in a monetary union also requires fiscal flexibility on the part of member states.” It remains to be seen how the economy will evolve to know how flexible national governments are willing to be in matters affecting their imperfect currency.
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