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Despite problems, economists still see euro benefits

/ 10:52 AM December 27, 2011

PARIS, France—Ten years after it went into circulation, experts judge the euro to have helped cut inflation but say hopes it would boost growth were dashed by a lack of policy coordination.

In the midst of a crisis that threatens the very survival of the currency, economists were somewhat pressed to find something to sing its praises about.

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“They (the advantages) don’t exactly leap out at the moment,” noted dryly Agnes Benassy-Quere, head of France’s CEPII institute on international economics.

Despite the current pessimism, however, economists agree that the longer-term benefits of the euro have been real and tangible, even if some helped set the stage for the current crisis.

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The end of currency exchange risk and costs helped reinforce the integration of European markets, boosting trade between those countries which adopted the common currency.

New studies showed this benefit to be “not enormous, but on the order of six percent” said Benassy-Quere.

Another benefit was in cutting inflation.

While some businesses exploited the currency change to raise prices, leaving consumers with the impression of a euro-related rise in living costs, economists said overall the euro has been good for inflation.

“From a point of view of price stability, the record is extremely positive” with inflation averaging at about 2 percent, said Benassy-Quere.

The drop was more significant for southern countries with historically high inflation levels, which nevertheless remain moderately higher today than those of their neighbours to the north.

The single currency also meant much lower interest rates, now set for the entire eurozone by the European Central Bank in Frankfurt—helping to sow the seeds of the current crisis.

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For countries like Spain the real interest rate—the nominal rate minus inflation—became negative, which encouraged loans and caused a “real estate bubble,” said Joerg Kraemer, chief economist at Germany’s Commerzbank.

The lower rates, thanks to being locked in the same currency with strong economies like Germany, also enabled successive Greek governments to go on a borrowing binge that resulted in today’s unmanageable debt.

One benefit of the euro, in the view of economist Francesco Giavazzi at Milan’s Bocconi University, is that it removed the ability of governments to use currency devaluation as an economic policy tool.

“Italy finally abandoned the idea that it could artificially recuperate its loss of competitiveness by successive devaluations,” he said.

Suddenly states and business had to face up to “their real productivity”, the economist explained, which should have led governments to adopt structural reforms to liberalise labour markets, though this was not always done.

In France and some southern eurozone countries, wages rose more than productivity gains, and without a currency depreciation to indirectly lower wages, competitiveness was further eroded.

While market integration, lower inflation and interest rates are all positive for growth, “in the end, the results are mixed because the eurozone is for some degree overstretched,” said Kraemer.

Countries which did not fulfil the criteria set out in the eurozone’s founding Maastricht Treaty, such as Greece and Italy, were allowed to join the euro.

“This, to a significant degree, explains the current problems,” noted the German economist.

For his French colleague, “if the euro did not bring all the expected benefits, that is in large part due to the governments” failing to coordinate economic policy, instead narrowly focusing on deficit reduction.

“These first ten years were a failure for the coordination of economic policy, much more than for budgetary policy,” said Benassy-Quere.

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