Author: Patrick Artus. NATIXIS PICK OF THE WEEK ECONOMIC RESEARCH, April, 2016
Monday 25 April 2016, by Carlos San Juan
There is a broad consensus on what is needed in the euro zone:
A much greater element of federalism to correct the income disparities between the countries caused by the heterogeneity of their economic structures and productive specialisations;
Coordination of demand-side policies (including fiscal policies) to prevent the continuation of the current situation of excess domestic savings in some countries (Germany) and overall;
The return of capital mobility between the countries, which could be achieved with eurobonds;
Coordination of wage and social policies to prevent the appearance of a non-cooperative equilibrium whereby the countries reduce labour costs in a race to the bottom.
But it seems clear that these reforms are not about to be implemented. What will be the result of this lack of institutional reform in the euro zone?
Due to the absence of federalism, income levels will continue to diverge between the countries, leading to a risk of acute political tension;
Due to the absence of demand-side policy coordination and capital mobility, there will continue to be excess domestic savings (and therefore a risk over time of an overvalued euro), a continued shortfall in investment and therefore weak productivity gains and low potential growth;
Due to the absence of coordination of policies that affect labour costs, there will be strong cost competition between euro-zone countries and therefore a risk of an across-the-board fall in real wages and social welfare.
Failure to implement the four reforms above (federalism, coordination of demand-side and wage policies, restoration of capital mobility) would therefore have extremely serious consequences.
Author: Patrick Artus