The Euro

Dr. Tsiklis

Fares Zouari

The Euro : Where are we now ?

It is very interesting what's happening to the euro, because in a sense it was always a very unlikely currency. We have many people have been arguing that you really cannot get a currency union without a political union. And there's an important reason for this. It is that when you actually join your currencies and you integrate them into one, you are giving up the possibility of the exchange rate as a mechanism of adjustments, which means that when you have major changes across the regions, you actually have to force a massive deflation or you need federal transfers to help recovery. Now, if you don't have political union, you don't get federal transfers; you don't get what is now being called a bailout, say, for Greece. And so that means massive adjustments, which are often actually impossible to achieve politically. The problem in Europe is actually not so much that Greece has been profligate or Spain is in a mess; the problem is that Germany is actually effectively playing the role that China is said to be playing in the global economy, which is to say it's been running very large trade surpluses. It's achieving productivity growth without real wage growth, which is making the rest of the euro zone uncompetitive, vis-à-vis Germany. And the rest of these economies cannot use the exchange rate to recover. So when people say, well, Greece has been profligate, one of the real reasons is because Greece got a lot of capital inflow, just like Spain got a lot of capital inflow. And partly it's climate. It’s like Florida gets a lot of capital inflow within the US. You have this money going in for construction, for all of this kind of thing, and that makes the real exchange-rate increase uncompetitive, not the nominal—there is no nominal exchange rate. But prices in Greece were rising faster than prices in, say, Germany. Now, this has made Greece uncompetitive. That's the real problem. And the same problem is...