Abstract
The ravages of two world wars and a desire to develop a politically and economically united Europe led to the establishment of the Eurozone in January 1999. The European Monetary Union was a grand experiment that brought 11 European nations under a single currency, the euro. Complexities associated with the implementation of effective fiscal, budgetary and banking coordination left the bloc vulnerable to asymmetries in the productivity and factor markets of its members. This article analyses how adoption of the euro, which prevented nominal exchange rate adjustments, impacted on the competitiveness and real economies of member states, thereby undermining the European Union’s key priority of creating balanced economic growth and productivity.
Highlights
The establishment of the Eurozone in January 1999 marked a significant step towards the European Union’s (EU’s) goal of ‘ever closer union’
Given the effect of real exchange rates on national competitiveness and current account imbalances, my second hypothesis examines whether currency distortions have had a significant effect on the real economy of European Monetary Union (EMU) nations: H2: Currency distortions, in the EMU, have had a significant effect on the gross domestic product (GDP), unemployment, balance of trade, and budget positions of Eurozone members
This paper provides valuable insights into the effect of currency distortions, generated by the EMU, on the competitiveness and real economies of Eurozone members
Summary
The establishment of the Eurozone in January 1999 marked a significant step towards the European Union’s (EU’s) goal of ‘ever closer union’. Notwithstanding, the absence of sufficient fiscal and budgetary coordination has created tensions between the diverse economies of the European Monetary Union (EMU) (Baldwin and Wyplosz 2012; De Grawe 2012; Stiglitz 2016) These issues adversely impact the EU’s key priority of creating balanced economic growth, competitiveness and productivity (Atkinson 2001). Peripheral economies can only adjust their competitiveness through prices and wages This will prolong a painful period of deflation, high unemployment and low productivity for deficit members (Arestis and Sawyer 2012; Eurostat 2018). This article makes several contributions to the literature It estimates the magnitude of currency distortions within the EMU, which suggests that a large proportion of Germany’s recent economic success may well have come at the cost of Downloaded from https://www.cambridge.org/core. This article supports the literature on OCAs by reinforcing the need for greater fiscal integration within the political union
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