Exporting Assets: EMU and the Financial Drivers of European Macroeconomic Imbalances

Abstract

European Economic and Monetary Union has fostered an unstable complementarity in European financial markets between the growth models favoured by European savers (in the northern 'core' of Germany and other exporting states) and its borrowers (in the debt-fuelled and demand-driven eurozone periphery, including countries like Greece and Ireland). In the 2000s, the result of this development was a sharp decrease in real interest rates across the eurozone periphery, leading to rapid but inflationary growth. This eroded the competitiveness of exporters in the European periphery, making them more reliant on capital inflows to pay for growing current account deficits. Those deficits became problematic after the disruption of eurozone financial markets beginning in 2008. The policy response to the crises has focused on reducing the competitiveness gap between the core and periphery -while overlooking the financial forces that contributed to those competitiveness differentials in the first place. Indeed, it is the fragile and perverse complementarity in eurozone financial markets -more than any external shock or competitiveness differences -that lies at the root of Europe's ongoing crisis. As prospective eurozone members prepared to irrevocably fix their exchange rates in the late 1990s, Milton Friedman (1997) took to the op-ed pages to rain on their parade. Sounding a note of scepticism about European economic and monetary union (EMU), he argued that: [The euro] would exacerbate political tensions by converting divergent shocks that could have been readily accommodated by exchange-rate changes into divisive political issues. Political unity can pave the way for monetary unity. Monetary unity imposed under unfavourable conditions will prove a barrier to the achievement of political unity.Friedman's chief concern, shared with many -particularly US-trained -economists, was rooted in Robert Mundell's notion of optimal currency areas (OCAs). In the world of OCA theory, the euro looked like a dubious proposition: because eurozone members were so economically distinct, shocks to the currency area would inevitably affect the various parts of the zone differently. Member states, robbed of exchange rate flexibility and their own monetary tools, also lacked bloclevel adjustment tools -such as easy intra-European migration or a federal government willing to transfer funds around the bloc. As a result, the critics argued, national governments would come to resent EMU as a policy straightjacket (Jonung and Drea 2009).

Introduction: Is the European Union Capable of Integrating Diverse Models of Capitalism?

“…As a result, wage coordination (and restraint) is less prominent in these countries, whose fragmented collective bargaining institutions further hinder attempts to deliver the type of incomes policies observed in the export growth models of Northwestern Europe (Johnston 2016). Within the Euro's early years, rising household debt, wage and credit growth, and the robust domestic demand that accompanied it, was further enhanced by a surge in access to foreign borrowing (see Fuller 2017).…”

Strong Firms, Weak Banks: The Financial Consequences of Germany’s Export-Led Growth Model

“…6 Wages have kept up with productivity relatively well for high value-added jobs in the manufacturing sector, but have failed to keep up even with inflation in the service sector and, partly, in the public sector (Albu et al 2018;Baccaro and Benassi 2017;Baccaro and Pontusson 2016;Di Carlo 2018). To the ex-4 For a discussion of the financial conditions that enable the asymmetric distribution of growth models between European countries, see Fuller (2018). 5…”

How Effective is Macroeconomic Imbalance Procedure (MIP) in Predicting Negative Macroeconomic Phenomena?

“…Even in the Eurozone, existing data suggest that relatively high inflation in the periphery has led to those countries' exports growing more expensive than exports from lower inflation eurozone economies. Both the current account and financial account-driven narratives of the crisis envision such inflation (Fuller, 2018). Sometimes high inflation rates reflect an increase in exchange market pressure (Barkbu, Eichengreen, and Mody, 2012).…”