Post-pandemic challenges for the eurozone

Monetary union is our common good. The virtues of the euro have proved its usefulness, notably in times of crisis, through the determined action of the European Central Bank. But the ECB cannot indefinitely palliate the inadequacies of structural policies such as the incompletion of the eurozone’s regulatory method.

The sustainability of European monetary union hinges on solidarity. But are the interests of European countries sufficiently aligned to achieve that solidarity? If divergences are too strong, it would be an illusion to believe in the long-term future of a budget such as the Next Generation EU plan or a Community debt, both of which stand as remarkable advances.

One-way solidarity

Since the creation of the eurozone, the Northern countries of the monetary union have further industrialised while the Southern countries have gradually deindustrialised. In correlation, the former have gained market share in global trade while the latter have lost ground. With their current account surpluses, Northern countries have accumulated net assets in the rest of the world; in contrast, with their current account deficits until the eurozone crisis, Southern countries have amassed debts relative to the rest of the world. A major divide also exists regarding initial education levels and occupational skills, and in terms of youth unemployment rates and employment rates. Productivity gains are also divergent, while differences between the North and South are growing in terms of public debt as a percentage of GDP. To safeguard the solidarity forged during the pandemic, trust must be established between Northern and Southern countries by reducing these major divergences. This calls for three vital things.

Firstly, Southern countries are duty bound to implement structural policies, i.e. ad hoc investments and reforms. This does not involve austerity measures, as, on the contrary, these policies serve to increase potential growth by boosting productivity, improving the effectiveness of initial education and occupational training, more effectively mobilising the working-age population (notably through pension reform) and optimising public spending. These reforms are the only way to prevent Northern countries from having to demonstrate one-way solidarity towards Southern countries on an indefinite basis. But while these reforms are necessary, they do not suffice in themselves. Structural policies alone will fail to remedy the industrialisation shortfalls of Southern countries.

Realistic budgetary rules

Hence the second vital need, for an industrial and regional planning policy in the European Union, implemented through targeted investment and aid from Northern countries to Southern countries. The Next Generation EU recovery plan is an answer. The projects involved must be effectively implemented so as to foster competitiveness and industrialisation in the relevant countries.

The third requirement is the reconstruction of shared and realistic budgetary rules, which are no longer such today. These rules must be effective and support these developments, while ensuring that there are no free riders in the Union.

If these three requirements are not fulfilled, populism will continue to rise in Northern countries refusing to indefinitely assist Southern countries, or populism will continue to grow in Southern countries increasingly deindustrialised without aid from the North. Devaluations, far from being a miracle solution, are not possible in a monetary region, making it more difficult for countries to catch up on competitiveness in isolation. This leads to the build-up of local industrial polarisation in countries with the greatest comparative advantages. Avoiding this trap will hinge on the aforementioned efforts at both Community and national level.

CEO of BRED and Professor of Financial Macroeconomics and of Monetary Policy at HEC Paris