17/11/2019 Euro a disaster waiting to happen when asymmetric external shocks strike

Sean Quinn's plea to Man, 26, dies after car Girl critical after Brendan Grace left Styles takes brutal Yellow warning as
Vatican slips off pier machete attack €493k in will swipe at Malik temps plummet

Euro a disaster waiting to happen when asymmetric

external shocks strike
05/11/2019

© Provided by Financial Times Limited Multiple denomination euro banknotes are arranged for a photograph inside a Travelex store, operated by Travelex Holdings Ltd., in London, U.K., on Monday, Jan. 12,
2015. The euro approached a nine-year low against the dollar as European Central Bank officials fueled speculation the institution will start a program of government-bond buying as early as next week to stave

off deflation. Photographer: Simon Dawson/Bloomberg 
Editor’s note: The opinions in this article are the author’s, as published by our content partner, and do not necessarily represent the
views of MSN or Microsoft.

I agree with Gyorgy Matolcsy that it was a mistake to adopt the euro prematurely in 1999 (“ It is time to recognise that the euro was a
mistake”, November 4). Indeed, the eurozone’s performance — 1.5 per cent annual gross domestic product growth over two decades
and only 0.8 per cent in the post-2018 period — is uncomfortably close to secular stagnation.

Perhaps more important, and contrary to expectations, the euro has failed to turbocharge trade within the currency club. At only 45 per
cent, the share of intra-eurozone trade in the members’ overall trade is lower today than it was in 1998. The euro has thus diverted
rather than created trade within the currency area. Crucially, instead of being an instrument of the much-anticipated convergence, the
euro has been a potent force of divergence between the EU’s core and periphery.

© Catalyst Images Euro coins and banknotes

https://www.msn.com/en-ie/money/topstories/euro-a-disaster-waiting-to-happen-when-asymmetric-external-shocks-strike/ar-AAJTgiz?li=BBr5KbJ 1/10
17/11/2019 Euro a disaster waiting to happen when asymmetric external shocks strike

However,
© Dr
Matolcsy has misdiagnosed the reasons for the failure when flagging the lack of a “common
2019 Microsoft state” and
Privacy & Cookies Privacy“eurozone finance
Settings Terms of use 

ministry” among them. None of these is required for a currency area to work acceptably well, as the theory of optimum currency area
also suggests. In my view, two other factors account for much of the euro fiasco.

First, even with its internally fixed-exchange regime the euro has not succeeded in eliminating the exchange rate risk, which has
surfaced in a viciously hidden and disruptive form as “internal” devaluation and appreciation of the diverse “national” euros. As a
combined result of low inflation and high productivity growth, Germany and the Netherlands, the two super-mercantilist exporters,
have reaped enormous trade competitiveness benefits from the large real devaluation of their respective euros. Without the euro, both
countries would have experienced substantial appreciation of their national currencies.

© Catalyst Images Close-up view of unrecognizable man counting money. Horizontal composition. Studio shot. Image developed from RAW format.

Second, no institutional arrangements were put in place to make up for the loss of the weaker member countries’ ability to use the
exchange rate and interest rate to maintain full employment and keep large trade and payments imbalances in check. Without
substantial fiscal co-ordination and transfers, the euro is a disaster waiting to happen when asymmetric external shocks strike. No
wonder that during the deep crisis of 2009-12, the eurozone was forced to introduce bailout funds such as the European Stability
Mechanism (which is kind of a fiscal union by the back door after the financial house is already on fire).

DrMatolcsy argues for an exit mechanism from the euro. I think a flexible euro (including a nationally differentiated set of convergence

criteria to replace the current one-size-fits-all Maastricht criteria) and an institutionally more complete monetary union provide a better
way forward.

Istvan Dobozi 

Sarasota, FL, US

Former Lead Economist, World Bank

1 2 3 4

Black Friday & Cyber Monday

Discount: 50% Off + FREE
Shipping

Ad MUAMA Enence Instant Translator Device

MORE FOR YOU

https://www.msn.com/en-ie/money/topstories/euro-a-disaster-waiting-to-happen-when-asymmetric-external-shocks-strike/ar-AAJTgiz?li=BBr5KbJ 2/10