Euro no place if you lack com­pet­i­tive­ness

Financial Mirror (Cyprus) - - FRONT PAGE -

The Eu­ro­zone was ini­tially sup­posed to make the mem­ber coun­tries more sim­i­lar. This has not hap­pened. Some mem­ber coun­tries are en­joy­ing rel­a­tively full em­ploy­ment and sat­is­fac­tory eco­nomic de­vel­op­ment and some are ex­pe­ri­enc­ing far dif­fer­ent sit­u­a­tions. Ger­many en­joys rel­a­tively low un­em­ploy­ment (4.7%) and mod­est eco­nomic growth, while the “bailout coun­tries”, Greece, Spain, Ire­land, Por­tu­gal, Cyprus, still have high lev­els of un­em­ploy­ment. Un­em­ploy­ment in Greece and Spain is still near 25%, a level not seen since the Great De­pres­sion of the 1930s.

Such eco­nomic di­ver­sity be­tween coun­tries us­ing a com­mon cur­rency can re­in­force the strengths of the eco­nom­i­cally stronger coun­tries of the Eu­ro­zone at the ex­pense of the weaker, less com­pet­i­tive, mem­bers. The fea­tures of the com­mon cur­rency in­di­cated be­low con­trib­ute to this:

Cap­i­tal Move­ment:

The Eu­ro­zone has been suc­cess­ful in re­duc­ing ex­change rate risk and other bar­ri­ers to cap­i­tal move­ment. But the ease of cap­i­tal move­ment can also prove harm­ful for coun­tries ex­pe­ri­enc­ing eco­nomic dif­fi­cul­ties. We have seen mas­sive amounts of cap­i­tal ex­it­ing coun­tries, such as Cyprus and Greece, which des­per­ately need cap­i­tal in­vest­ment to be­come more com­pet­i­tive. This flee­ing cap­i­tal seeks the safety of mem­ber coun­tries do­ing bet­ter eco­nom­i­cally and of­fer­ing su­pe­rior in­vest­ment


In­ter­est rates:

Closely re­lated to cap­i­tal move­ment is the ques­tion of in­ter­est rates. Low in­ter­est rates en­cour­age in­vest­ment in new busi­nesses and are cru­cial for coun­tries hop­ing to pro­mote new busi­ness en­ter­prise. Cap­i­tal out­flows, such as dis­cussed above re­duce cap­i­tal avail­abil­ity, rais­ing in­ter­est rates in those coun­tries which can least af­ford them. In 2015, the rel­a­tively stronger economies of the Eu­ro­zone (Fin­land, Hol­land, Bel­gium, Lux­em­bourg, Ger­many, France) had long term in­ter­est rates of less than 1%. Those coun­tries in re­ces­sion or just emerg­ing – Spain, Italy and Por­tu­gal – were sig­nif­i­cantly higher with Greek long term rates at 11% (cur­rent bond yields at 29%) and Cyprus rates at 6% (ECB sta­tis­tics).


A coun­try’s youth rep­re­sents a ma­jor in­vest­ment for the fu­ture. Bil­lions have been spent on their ed­u­ca­tion. They are a key re­source for coun­tries hop­ing to emerge from re­ces­sion. The sin­gle cur­rency has un­doubt­edly made the em­i­gra­tion of such per­sons eas­ier. Not only are tra­di­tional bor­der bar­ri­ers re­duced but univer­sity and pro­fes­sional qual­i­fi­ca­tions are now more gen­er­ally recog­nised, fa­cil­i­tat­ing job search and ap­pli­ca­tion.

Bloomberg re­cently re­ported that the out­flow of pro­fes­sion­ally qual­i­fied per­sons leav­ing Greece is now at roughly ten times the level be­fore the fi­nan­cial cri­sis. (20,281 pro­fes­sion­als left Greece be­tween 2009-2014 ver­sus 2,552 in the com­pa­ra­ble pe­riod prior to the cri­sis). Cyprus em­i­gra­tion in­creased more than 400% since the fi­nan­cial cri­sis, from 4,106 in 2007 to over 25,000 an­nu­ally in 2013.

Coun­tries in the Eu­ro­zone share a com­mon ex­change rate re­gard­less of their in­ter­na­tional com­pet­i­tive­ness. Ger­many has a mas­sive trade sur­plus, Greece has a gen­er­ally weak in­ter­na­tional trad­ing



per­for­mance with fre­quent deficits. Yet they both share the same cur­rency with the same ex­change rate. This ben­e­fits the in­ter­na­tion­ally stronger coun­tries and works against the in­ter­ests of those with a weaker trade per­for­mance. There is lit­tle doubt that if, for ex­am­ple, Greece were out­side the Eu­ro­zone, its ex­ports would be cheaper and prices to tourists lower.

The above struc­tural fea­tures make for in­sta­bil­ity within the Eu­ro­zone. They in­crease the dis­ad­van­tages of the less com­pet­i­tive mem­ber coun­tries while re­in­forc­ing the ad­van­tages of the stronger economies. Fi­nan­cial aid and bail outs as of­fered by the Eu­ro­zone are not a long term so­lu­tion.

The longer term so­lu­tion is to im­prove the com­pet­i­tive­ness of the weaker coun­tries. Mea­sures such as pri­vati­sa­tion, labour flex­i­bil­ity, smaller gov­ern­ment, a more com­pet­i­tive do­mes­tic eco­nomic en­vi­ron­ment, bet­ter ed­u­ca­tion are di­rected at the root of the prob­lem. With­out such mea­sures, the bail-out, bail-in coun­tries presently re­ceiv­ing fi­nan­cial aid are likely to be back at some fu­ture date ask­ing for more.

This is the think­ing be­hind the Eurogroup’s em­pha­sis on “restruc­tur­ing” mea­sures. They are needed to put the less com­pet­i­tive coun­tries on a par with the rest of the Eu­ro­zone. Yet, it is sim­plis­tic to be­lieve that such mea­sures alone, use­ful as they are, will by them­selves prove suf­fi­cient. They do not be­gin to touch on the cul­tural prob­lems these coun­tries face, such as nepo­tism, cor­rup­tion, weak gov­ern­ment and dys­func­tional po­lit­i­cal par­ties. There is lit­tle the Eurogroup can do to cor­rect such is­sues. This can only be done by the cit­i­zens of each coun­try in the courts and at the bal­lot box.

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