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By Dr. Jim Leontiades
Cyprus International Institute of Management
The Eurozone was initially supposed to make the member countries more similar. This has not happened. Some member countries are enjoying relatively full employment and satisfactory economic development and some are experiencing far different situations. Germany enjoys relatively low unemployment (4.7%) and modest economic growth, while the “bailout countries”, Greece, Spain, Ireland, Portugal, Cyprus, still have high levels of unemployment. Unemployment in Greece and Spain is still near 25%, a level not seen since the Great Depression of the 1930s.
Such economic diversity between countries using a common currency can reinforce the strengths of the economically stronger countries of the Eurozone at the expense of the weaker, less competitive, members. The features of the common currency indicated below contribute to this:
Capital Movement: The Eurozone has been successful in reducing exchange rate risk and other barriers to capital movement. But the ease of capital movement can also prove harmful for countries experiencing economic difficulties. We have seen massive amounts of capital exiting countries, such as Cyprus and Greece, which desperately need capital investment to become more competitive. This fleeing capital seeks the safety of member countries doing better economically and offering superior investment opportunities.
Interest rates: Closely related to capital movement is the question of interest rates. Low interest rates encourage investment in new businesses and are crucial for countries hoping to promote new business enterprise. Capital outflows, such as discussed above reduce capital availability, raising interest rates in those countries which can least afford them. In 2015, the relatively stronger economies of the Eurozone (Finland, Holland, Belgium, Luxembourg, Germany, France) had long term interest rates of less than 1%. Those countries in recession or just emerging – Spain, Italy and Portugal – were significantly higher with Greek long term rates at 11% (current bond yields at 29%) and Cyprus rates at 6% (ECB statistics).
Emigration: A country’s youth represents a major investment for the future. Billions have been spent on their education. They are a key resource for countries hoping to emerge from recession. The single currency has undoubtedly made the emigration of such persons easier. Not only are traditional border barriers reduced but university and professional qualifications are now more generally recognised, facilitating job search and application.
Bloomberg recently reported that the outflow of professionally qualified persons leaving Greece is now at roughly ten times the level before the financial crisis. (20,281 professionals left Greece between 2009-2014 versus 2,552 in the comparable period prior to the crisis). Cyprus emigration increased more than 400% since the financial crisis, from 4,106 in 2007 to over 25,000 annually in 2013.
Exchange rates: Countries in the Eurozone share a common exchange rate regardless of their international competitiveness. Germany has a massive trade surplus, Greece has a generally weak international trading performance with frequent deficits. Yet they both share the same currency with the same exchange rate. This benefits the internationally stronger countries and works against the interests of those with a weaker trade performance. There is little doubt that if, for example, Greece were outside the Eurozone, its exports would be cheaper and prices to tourists lower.
SHORT AND LONG TERM SOLUTIONS
The above structural features make for instability within the Eurozone. They increase the disadvantages of the less competitive member countries while reinforcing the advantages of the stronger economies. Financial aid and bail outs as offered by the Eurozone are not a long term solution.
The longer term solution is to improve the competitiveness of the weaker countries. Measures such as privatisation, labour flexibility, smaller government, a more competitive domestic economic environment, better education are directed at the root of the problem. Without such measures, the bail-out, bail-in countries presently receiving financial aid are likely to be back at some future date asking for more.
This is the thinking behind the Eurogroup’s emphasis on “restructuring” measures. They are needed to put the less competitive countries on a par with the rest of the Eurozone. Yet, it is simplistic to believe that such measures alone, useful as they are, will by themselves prove sufficient. They do not begin to touch on the cultural problems these countries face, such as nepotism, corruption, weak government and dysfunctional political parties. There is little the Eurogroup can do to correct such issues. This can only be done by the citizens of each country in the courts and at the ballot box.
