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Back to El euro, España y el futuro de la Vieja Europa

Javier Díaz-Giménez , Professor, IESE, University of Navarra

The euro, Spain and the future of Old Europe

Sun, 14 Feb 2010 08:40:22 +0000 Published in El Mundo (Madrid)

As we all know, countries that are part of a monetary union give up their local currencies and share a common currency. It is also known that members of monetary unions necessarily share their monetary policy and exchange rates. But not all monetary unions share their fiscal policy.

The U.S. states and the Spanish autonomous regions, for example, belong to two monetary unions whose members share fiscal policy. In contrast, the 16 countries that are part of the European Monetary Union have independent fiscal policies. And as we are seeing these days, with the tribulations of the Greek public debt and the risk of contagion to the Spanish debt, the Achilles heel of the monetary unions formed by independent countries is precisely that, the lack of a common fiscal policy.

The advantages for relatively small countries like ours of belonging to a monetary union are many. We automatically enjoy one of the most solvent monetary policies in the world: that of the European Central Bank (ECB). In practical terms, this policy has allowed us to enjoy the lowest inflation rates in the post-war period, fees , for the last 10 years.

Moreover, it has allowed us to withstand shocks such as the Argentine crisis of January 2002 without hardly noticing it. And we have enjoyed much more stable exchange rates than we had during the last decade of the peseta's life. Transaction costs with the other euro countries have been significantly reduced, and this has allowed us to expand our markets and intensify skill, which always results in improvements in the quantity and quality of goods and in price reductions.

Of course, since nothing is free, there are drawbacks. The most obvious one is that the economic cycles affecting each country can be misaligned, and the common monetary policy may not be the ideal policy for each country at any given time. Between 2002 and 2007, this misalignment of cycles has been particularly evident in the case of the eurozone. The hard core countries of the Monetary Union - Germany and France, which alone account for 47% of the eurozone's GDP, and 60% if we add the Netherlands, Belgium and Austria - experienced very slow growth fees and monetary policy was very expansionary for a long time.

The ECB kept intervention rates at 2% between June 2003 and December 2005. Those rates favored growth in the hard core countries, but contributed decisively to the over-indebtedness of Spain, Ireland and Greece, and to the training of the Irish and Spanish real estate bubbles. A monetary policy more in line with our needs would probably have limited our expansion then and favored our recovery now.

In order to solve the problems posed by the single monetary policy, financial aid there should be a mobility of work, as there is among the states of the United States, as there was once among the Spanish regions, and as there is not and will hardly be among the countries of the Eurozone.

Also financial aid that real wages are flexible to leave. In other words, nominal wages should fall faster than prices. When this does not happen, fiscal coordination becomes essential. The EU's Stability and Growth Pact is an attempt by eurozone countries to limit divergences in their fiscal policies, but it lost its effectiveness when France and Germany skipped it.

Moreover, deficits were not limited in the event of a GDP contraction, as we are unfortunately still experiencing. This is why the members of the Union have come together to decide how best to resolve the Greek debt crisis. For this reason and because, although it may not seem so, at the heart of the Eurozone beats a project that is more political than economic.

Well, because of that and because the costs of bailing out Greece are nothing compared to those of World War II. It is shocking to remember that eight and a half million people died in the top 10 countries of Western Europe, and that in 1945 the cumulative GDP backlog of those 10 countries was 263 years. And no one wants that atrocity to be repeated.