The euro zone’s founding members are further apart economically than they were at the launch of the single currency, a “disappointing” outcome defying the premise that laggards would slowly catch up, the European Central Bank said on Wednesday (29 July).
Early members failed to recognise that lower borrowing costs, a key benefit in the currency union, would only provide a temporary boost, and left unchecked, would actually lead to many of the troubles that plunged the bloc into its debt crisis.
“Progress towards real convergence among the 12 countries that formed the euro area in its initial years has been disappointing,” the ECB said in an economic bulletin.
The unusually strong commentary from the bank highlights the fragility of the currency union, which is still fighting an existential crisis after Greece came close to being forced out after years of failed reforms and ballooning debt.
Though not a founding member of the currency union, Greece was included in 2001 and was among the 12 nations that started using the euro banknotes in 2002.
Euro zone membership pushed down borrowing costs, fuelling unsustainable credit-driven growth, and governments assumed this would last, leading to unrealistic growth expectations. Once the boost ran out and growth faltered, debt levels rose quickly.
Ireland, Portugal, Cyprus and Greece have received international bailouts since the start of the euro zone debt crisis and growth across the bloc is expected to be muted for years to come.
“There is some evidence of divergence among the early adopters of the euro, given that over 15 years a number of relatively low-income countries have maintained (Spain and Portugal) or even increased (Greece) their income gaps with respect to the average,” it added.
“Moreover, Italy, initially a higher-income country, recorded the worst performance, suggesting substantial divergence from the high-income group,” it added.
Governments also kept in place rigid and protected product and labour market structures with little ability to flexibly adjust wages, exacerbating the effect of the crisis as currency devaluation could no longer be used to reestablish competitiveness.
With capital allocated to low productivity sectors, part of the protectionist framework, even relatively high productivity sectors suffered, weighing on overall growth.
Meanwhile, late jointers Estonia, Latvia, Lithuania and Slovakia have recorded the highest degree of convergence among the EU countries, the ECB added.
At the eurozone summit of 24 October 2014, the presidents of the European Commission, the Council, the Eurogroup, the European Parliament and the European Central Bank were invited to combine their efforts to prepare the "next steps for a better economic governance in the euro area".
A first draft, carefully presented as an "analytical note", was discussed by EU leaders at a summit in February.
The discussion continued in June with the publication of a report by the five presidents, which proposed threes stages, until 2025, to deepen integration among eurozone countries.
- Stage 1 (1 July 2015 - 30 June 2017): A "deepening by doing" stage where small steps are taken towards fiscal convergence, using "existing instruments" and treaties.
- Stage 2 (30 June 2017 - 2025): A "more binding" completion stage, with "a set of commonly agreed benchmarks for convergence that could be given a legal nature, as well as a euro area treasury".
- Stage 3 (By 2025 at the latest): A final stage, where the vision would be complete.
A need for economies and budgets to converge would "inevitably involve sharing more sovereignty over time", the report added, saying such steps would only be envisaged after 2017, when French and German elections are being held.
In practice, this would require EU countries to "accept increasingly joint decision-making on elements of their respective national budgets and economic policies", it adds, saying this would "pave the way for some degree of public risk sharing", a reference to euro bonds.
One ultimate outcome could be a "euro area treasury", although the report stressed it did not foresee "stabilising" cash transfers going permanently to certain states, nor seek to use them to equalise incomes among rich and poor countries.