Macroeconomic stability has always been one of the primary objectives in the Euro Area. 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.
We have collected 12 indicators and derived four different sub-indices: (1) Cycle Synchronicity (consisting of dispersion in GDP real growth, GDP per capita growth and unemployment rates); (2) Competitiveness (consisting of dispersion in unit labour costs, real exchange rates, HICP inflation); (3) Public Finances (consisting of dispersion in public deficit and public debt both as a percentage of the GDP; and (4) Monetary dispersion (consisting of dispersion in M3 growth, credit to the private sector growth, current account balances and Target2 balances). These four sub-indices were aggregated to produce an overall index of monetary integration since the inception of the Euro in 1999.
Analysis of the indices show that since the adoption of the euro, Member State economies have become less integrated as the competitiveness and monetary sub-indices in particular seem to suggest, signalling a failure of the single currency to bring about a more integrated and harmonised economic area.
However, since 2015 the indices seem to exhibit signs of improvement. The new fiscal measures adopted by the EU, along with the adjustment in prices by Member States which were affected the most by the Global Financial Crisis and the Euro Crisis, seemed to have been effective in creating closer economic integration. Additionally, the Quantitative Easing programme performed by the European Central Bank, which commenced in 2015, helped to offset monetary dispersion across Member States.
- What the indices reveal is that the adoption of the single currency has not increased macroeconomic convergence among the MSs. (1) This makes asymmetric crises more likely, posing a threat to the overall stability of the Eurozone; and (2) it makes it more and more difficult to design a single monetary policy to fit all MSs.
- The disparity in competitiveness needs to be urgently addressed, since it is the main culprit for the widening divergence of the past 19 years. What it shows is that MSs markets do not function as efficiently as needed in a common monetary area, where shocks should be addressed by changes in costs and prices rather than through output losses and increased unemployment.
- The efforts made at the Eurozone level, in the form of more stringent fiscal and macroeconomic surveillance approved at the EU level, have resulted in a reduction in the cycle and public finances differences across MSs, indeed they have returned to pre-crisis levels.
- Finally, the ECB’s Quantitative Easing programme (2015-2018) seems to have improved monetary integration in the Eurozone, although at the cost of increasing Target2 imbalances even more. This is an issue MSs will have to address at some point.
The implications of the latest data up to 2018 are explored in further detail in the full report.