Jeff Franks, 29 January 2018
Jeff Franks began his talk with the good news that, since the crisis, all members of the EU have been experiencing some degree of economic growth. The first caveat, of course, is that this growth is in many cases a mere recovery to pre-crisis levels, but this news is certainly better than the alternative and shows that the EU is able to stabilize after a severe shock. A closer look at European growth shows us, however, that although all countries have experienced growth, the levels of growth between countries are diverging meaningfully. The concept of divergence, and its opposite, convergence is central to how Franks analyses the effectiveness of the European Union.
For Franks, there are four key types of convergence: nominal convergence, which measures variation in inflation levels and interest rates between EU states; structural convergence, which looks at variation in government regulation of the economy; real convergence, which measures income levels; and cyclical convergence, which measures not the current level of economic activity but the current stage an economy finds itself in, assuming a natural pattern of boom and bust. An ideal EU would see convergence by all these measures between all its component states.
Unfortunately, the post-crisis EU has seen divergence both in economic growth and in productive output. It makes sense that these two types of divergence would be correlated, what is less obvious is the underlying cause of this divergence. The expectation had been that opening of borders and convergence of economic policy would allow for more inter-country trade and investment. This prediction was not incorrect but it fails to consider the type of investment which actually occurs. In Southern Europe, i.e. Greece, Spain, Portugal, the majority of investment from wealthier EU countries was real estate, while in Eastern Europe, i.e. Czech Republic, Estonia, Latvia, the investment was primarily in manufacturing infrastructure. The results of this difference are clear today, with these Southern countries being the most negatively divergent in today, with these Southern countries being the most negatively divergent in terms of productive capacity and income levels, while the Eastern Countries are quickly converging with the rest of Europe by both these measures. Through further analysis one finds many more instances of flawed economic prediction.
Another such mistake regards nominal convergence. The period preceding the formation of the EU saw great nominal convergence in Europe, with inflation and interest rates converging to Germany’s levels. What is easy to miss is that inflation was converging faster than interest rates, meaning that when interest rates were adjusted for inflation they were actually lower than Germany’s. A more general assumption which turned out to be wrong is that open borders would encourage large numbers of people to migrate to work in other countries. The hope had been that higher wages would attract workers from poorer countries, thereby both increasing the wages of those who stayed in poorer countries and lessening the cost of labor in rich countries, a win-win situation. In reality only 4-5% of the citizens of the EU work abroad, not a significant increase from pre-EU days. Although trade has increased within the EU, trade has grown greatly worldwide and to a greater degree than within the EU during the same period.
During the planning of the EU, the general consensus was that nominal and structural convergence should be prerequisites for inclusion in the Euro zone and that the happy outcome of this inclusion would be real convergence. Now that the EU has existed for almost three decades, and made it through its first major crisis, we can see that things are not so simple.
by Solomon La Piana
No comments:
Post a Comment