EUROZONE INDEX OF MACROECONOMIC INTEGRATION
The effects of the monetary union can be assessed from various perspectives. In this study, we have collated an overall index of monetary integration by comparing four fundamental factors (cycle synchronicity, competitiveness, public finances, and monetary dispersion) across the nineteen Eurozone Member States as they joined the Euro Area. A breakdown of what each category is compiled in the table below:
As can be observed below, the dispersion in Eurozone already doubled between 1999 and 2007, the years before the outbreak of the Global Financial Crisis. However, between 2007 (237.97) to 2012 (426.96) the dispersion more than doubled again. In recent years, despite the efforts by the Eurozone to tackle the effects of the Global Financial Crisis and the Euro crisis, the asymmetries among the Member States remain substantial and have yet to return to pre-crisis levels of dispersion (the figure stood at 443.00, in 2019).
Sources: EuroStat (GDP, GDP per capita, Government Debt, Government Deficits, Unemployment rate, Unit Labour Costs, Inflation, Real Exchange Rate), IMF (Current Account), World Bank (Credit, Private), ECB (Target balances).
Note: A higher value on the vertical axis means greater dispersion or less integration.
If we look into dispersion in different categories, we observe that:
(1) Monetary dispersion in the Eurozone in 2008 was 224.2. Four years later in 2012 it had drastically increased to 544.5; this shows the significant asymmetries among MSs in the creation of money and the provision of credit. The ECB Asset Purchase Programmes (2015-2018) mitigated these asymmetries at the cost of expanding Target balances across MSs even further. Even in 2019, monetary dispersion (including Target balances) was still very far from the pre-crisis levels.
(2) The competitiveness dispersion index follows a similar trend to that of the monetary dispersion index for the Eurozone, but the trendline is relatively steeper during the post-crisis years period. The trendline demonstrates a sharp increase in asymmetries from 377.6 to 862.94 in only three years, from 2006 to 2009. What it is equally remarkable is that these asymmetries were already building up in the pre-Global Financial Crisis period. In 2010, the figures picked up slightly to 815.2 but gradually declined thereafter until 2015.
(3) As per the business cycle dispersion in the Eurozone, we observe first convergence in the pre-crisis years (40% less dispersion in 2006 compared to that in 1999), followed by an increase in dispersion in the crisis years (from 102 in 2008 to 155 in 2012). Since then, there has been a decreasing trend in dispersion, which is now even lower than that in 1999.
(4) The public finance index follows a similar trendline to the business cycle index. The MSs have continued to become more integrated since 2012. The dispersion in the public finance index in 2019 (98.28) is currently very similar to that in 1999.
Note: A higher value on the vertical axis means greater dispersion or less integration.
The analysis of the indices shows that since the adoption of the Euro, Member State economies have become less integrated as the competitiveness and monetary sub-indices seem to suggest. This signals a failure of the single currency to bring about a more integrated and harmonised economic area even in the years prior to the outbreak of the Global Financial Crisis.
Nonetheless, since 2015 the indices seem to exhibit signs of stabilisation and even improvement. The new stringent fiscal measures adopted by the EU, along with the adjustment in prices by the Member States which were most affected by the Global Financial Crisis and the Euro Crisis, seem to have been effective in creating closer economic integration. Additionally, the Quantitative Easing programmes undertaken by the European Central Bank, which commenced in 2015, helped to offset monetary growth dispersion across the Member States, and thus mitigated dispersion in the other chapters/sub-indices.
Acknowledgments: We would like to thank the IIMR research assistants for their contribution to the update of the datasets needed to build up our indices; in particular, Shivani Pradhan, Ibrahim Hakim and Alessandro Venieri.
Authorship and how to quote: This is an IIMR project coordinated by Dr Juan Castaneda and based on his research with Professor Pedro Schwartz on this topic:
- ‘How Functional is the Eurozone? An Index of European Economic Integration Through the Single Currency’. October 2017. Economic Affairs 37 (3).
- ‘An optimality index of the single currency: internal asymmetries within the eurozone since 1999’. In Castaneda, Roselli and Wood (eds.): The Economics of Monetary Unions. Past Experiences and the Eurozone. Chapter 7. 2020. Routledge.