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Euro v ‘Sustainable Growth’: Mythology of Brussels Economics

This is a syndicated repost published with the permission of True Economics. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.

Euro existence has been invariably linked to the promise of a ‘sustainable’ prosperity. From days when it was just a dream of a handful of European integrationists through today.  Which means that we can have a simple and effective test for the raison d’être of common currency union: how did GDP per capita fare since the euro introduction.So let’s take a simple change in GDP per capita, expressed in constant prices (controlling, therefore, for inflation) across the advanced economies around the world. Chart below details annualised rates of growth achieved between the end of 1999 and the end of 2014.

Excluding the most recent addition to the euro area, let’s consider the original EU12. Across all advanced economies (34 of them), average annualised rate of real GDP per capita growth was 1.57%. Across the euro area 12 it was 0.727% – less than 1/2 of the average. Average for non-euro area 12 states was 2.126% or almost 3 times the euro area 12 average.

All of this translates into a massive gap between the euro area 12 (euro ‘growthology’ states that supported from the start the idea of ‘sustainable’ growth based on the EMU) and the rest of the advanced economies. In cumulative terms – over 2000-2014, EA12 states clocked growth of 11.674% in terms of their real GDP per capita. Over the same period of time, ex-EA12 advanced economies managed to grow on average by 40.01%.

Oh dear… even if you are not Italy or Cyprus (the latter made utterly insolvent by the EU inept ‘resolution’ of the Greek crisis and then promptly accused of causing this disaster upon itself – just to ad an insult to an injury), even if you are the ‘best in the class’ Ireland… within the euro, you are screwed.

So the key question is: where is the evidence that having a common currency results in better economic outcomes? Key answer is: nowhere. 

2 Comments

  1. Le Rude Frog

    The purpose of a common currency union was NOT to benefit the unlucky dumbkopfs in the southern tier. The purpose was to protect the banks and other lenders from losing 100% of the moronic investment they made in subsidizing socialist countries. The goal was taking away their printing press, which they have done for now. Bottom line, you loan money to deadbeats, one way or another you will never get it back.

  2. Al Tinfoil

    Le Rude Frog Absolutely correct, IMHO.  Plus, the loss of their own currencies removed the printing press and control over interest rates and EXCHANGE RATES.  This translates into an enormous advantage to any country in the EMU that achieves a trade surplus with other EMU countries.
    Normally, running a trade surplus raises the value of a country’s currency, making its exports more expensive.  The importing country can also counteract its trade deficit by lowering the value of its currency by printing money or lowering interest rates.  These powers of control over value of currency and trade competitiveness were taken away from the members of the Euro zone.  
      The big winner in the Euro system has been Germany.  Germany has achieved huge trade surpluses with other members of the Euro zone, who are helpless to defend their home industries against the uber-efficient and uber-competitive German exporters.  Manufacturing employment in countries other than German has stagnated or fallen.
      Meanwhile, the French, German, Italian and UK banks went on a lending spree to the PIIGS based upon the implied virtues of the Euro: that it could not be devalued by the borrowing countries, and would be backed by the European Central Bank (ECB).  Sure enough, when it became clear in 2009-2010 that the PIIGS had issued far more in bond debt than they could ever pay, and that the banks in France, Germany, Italy and the UK were in danger because they held so much in worthless bonds, the ECB, IMF, and EC bought the bonds while saddling the taxpayers of the PIIGS with the debts and austerity measures meant to ensure that first priority was given to paying off the debts.
      The result has been to save the banks, but the PIIGS were put into depression and political instability.  Now that Greeks have elected an anti-austerity party, the Troika is in a panic to prevent the end of their “extend and pretend” game to conceal the fact that the PIIGS can never hope to pay the debts and the fact that the bonds held by the Troika are actually worthless.  What is at risk is confidence in the Euro and confidence in the ECB to manage the Euro zone. 

    One more comment. The graphs with the above story show how statistics can mislead.  The European countries listed on the right-hand side of the graphs started with low levels of GDP, so any absolute increase in GDP, however small, translates to an exaggerated percentage gain as against countries that had larger GDP bases at the beginning of the test period.

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