25 years of monetary union: The eurozone through its crises

The eurozone has gone through a series of crises that have sometimes threatened its survival, but these have also led to reforms in its fiscal governance and to changes in how it conducts monetary policy. On the eve of the European elections, 25 years after its creation, the question arises of how well the eurozone's economy has performed in comparison with the US economy. While the trajectories of their GDP per capita were relatively similar between 1999 and 2008, since then they have diverged markedly. We look at the possible causes of this growing gap, distinguishing between supply and demand factors. ■ On the supply side, the eurozone's productivity has grown much less than in the United States over the period as a whole. In contrast, while the employment rate of the workingage population has stagnated in the United States, it has improved significantly in European countries, although there continue to be disparities within the continent. More recently, the divergence has been due to the impact of the energy crisis and the steeper rise in energy prices in Europe as a result of the drop in the supply of Russian natural gas following the outbreak of the Ukraine war. ■ On the demand side, it has to be said that there is a very real deficit in aggregate demand in the eurozone. Saving has clearly outstripped investment since 2010, fuelling global trade imbalances. One reason for this extra saving is a more restrictive fiscal policy in Europe than in the United States. The aggregate under-performance of the eurozone as a whole has gone together with very heterogeneous trajectories within the zone. For the period as whole, the "northern" countries have grown faster than France and the "southern" countries, although some countries, notably Italy, have recently closed part of the gap. The challenge over the years ahead will be to handle fiscal consolidation and its impact on activity. ■ It is imperative not to repeat the mistake of 2011-2014. Fiscal consolidation may be appropriate during a period of economic recovery, but it is pernicious or at least ineffective when the economy is sluggish; if it proves necessary during a period of economic weakness, it will harm activity less if it is gradual, smoothed out and not synchronized across the eurozone. ■ Furthermore, the priority on this side of the Atlantic cannot solely be to restore public finances, when this risks further widening the economic gap with the United States: given the new global and geostrategic challenges, Europe must finance its security, the ecological transition and new green industries. An ambitious European recovery plan should use its structural saving surplus to target both supply and demand, so as to make it possible to meet these challenges and put pressure on the economies, thereby stimulating growth and productivity. Higher potential growth is crucial to ensure the long-term sustainability of the public debt.