ECBs Cœuré: The eurozone is like a grueling triathlon

ETU Challenge Kraichgau 2012

ECB Executive Board Member Benoît Cœuré gave an interesting speech to a government audience in Athens recently on Convergence 2.0. He says trying to create the eurozone and stop it from collapsing is a lot like a grueling Ironman triathlon. He also suggests convergence in future will involve not so much peripheral Europes standards of living rising to those of the center, but more having centralized economic policies imposed across Europe.


Economic and Monetary Union (EMU) is a political triathlon. It requires resilience when the heat is on and it requires commitment and resolve for participants to perform well at all times in the three policy disciplines that mark a currency union: fiscal policy, economic policy and financial policy. But there is one important difference with a triathlon: EMU is a team effort. Only if every participant performs well can the euro area team be strong. This is the most important lesson from the crisis. […]

The European economy is undergoing a moderate recovery, but complacency would be unwarranted. To really overcome the crisis, there are some remaining major challenges still to be faced. First, the euro area’s debt has stabilised, but remains at high levels.

Cœuré inserts a footnote here: The debt level is especially high in some Member States: for instance, public debt stood at 175.1% of GDP in Greece and 132.6% in Italy, while private sector debt amounted to 319% of GDP in Ireland and 252% in Portugal. Has anyone in officialdom ever mentioned a plausible plan for what to do about these terrifying numbers? It feels like a bomb waiting to go off sooner or later.

Second, euro area unemployment is still high and the youth are suffering disproportionately. Finally, growth is only resuming at a slow pace. Investment has been too low in Europe over the last 15 years, and the crisis has exacerbated this trend. At the same time, total factor productivity, which forms the basis of long-term growth, has also been disappointing. If this trend continues over the long term, the euro area will not generate enough wealth to sustain the standard of living of its citizens and to ensure the sustainability of its social model, which is a defining feature of its identity. […]

The challenges I outlined a minute ago call for an answer that goes beyond the necessary application of the existing rules of EMU. An answer that not only fosters stability and confidence today, but also in the future. An answer that gives EMU the institutional shape it needs to be a successful project in the long run. This answer could in my view take the form of what I call “convergence process 2.0”, which should have an agreed timeline and milestones. To run the political triathlon of EMU and perform well in all three disciplines, there needs to be a convergence of economic policies and structures. Moreover, joint action is of the essence.

Old convergence was about making the UK, Ireland, Southern Europe and the post-Communist countries richer, e.g. “converging” with Franco-German levels of wealth. It is more obviously unrealistic today to expect the peripheral eurozone to perform as well as Germany – in fact divergence is worsening. Coeurés new convergence would be more about forcing the same economic policies onto all countries. So the eurozone is offering more realistic promises now: You wont necessarily get richer, but you will have less self-government. The ambition is more reasonable: Poorer, more centralized.

Admittedly the old convergence was a bit of a farce because it treated all countries as the same and saw converging nominal GDP figures through financial tricks as proof of success, without asking if there was any real wealth production behind it, e.g. whether the French were actually making anything of value, whether anyone was going to buy those Spanish houses, or whether you could ever cash in those Greek IOUs.

With regard to convergence in economic structures and policies, the starting point has to be decisive action at national level. Euro area governments need to step up structural reforms, in particular those which have the greatest efficiency gains given the relative distance to best practices. Policy-makers should pay due attention to ensure that the burden of the adjustment effort is shared fairly. The perception of fairness of reforms in the national context is a key ingredient in their success. Fighting tax evasion, rent seeking and corruption as well as increasing transparency are key examples.

I have always been befuddled by the assumption among many comfortably-paid and unfireable international civil servants that “structural reforms” which typically refers to reducing wages, increasing job insecurity for everybody else and privatizing as much as possible  is the panacea for growth. These arent the reason Germanys economy is superior, for example, after all wages there are often pretty high and many jobs are quite protected (I am not talking about the one euro jobs).

These efforts at the national level should be complemented by structural reforms at the European level, aimed at deepening the Single Market, the cement that holds all our economies together. This is particularly true of the Single Market for capital, where a lot can still be done to enhance both risk-sharing and allocative efficiency.

There seems to be some division within transnational high officialdom on this point. Coeurés ECB colleague Vítor Constâncio has said European capital liberalization worsened speculation and IMF researchers have suggested the free movement of capital has also caused speculative booms in emerging countries. Cœuré seems to think capital needs to be even more liquid.

Structural reforms at the national level could also go beyond the country-specific perspective in the areas of direct relevance for the smooth functioning of EMU. In these areas, convergence could be embedded in a binding European effort, based on benchmarks to be met by all euro area Member States. This process would be a race to the top and would close the gap to the frontier in terms of competitiveness and resilience.

I wonder how this was received by his Greek audience? The recipients of these policies dont seem to be feeling very elevated by them.

For this process to be fully effective and legitimate, it would have to entail the gradual pooling of sovereignty in these policy areas and be based on the Community method with due involvement of the European Parliament. […]

In the longer term, the convergence process could culminate in the transfer of certain budgetary responsibilities to the European level with a view to strengthening risk-sharing within the currency union. But let me add an important note of caution. This can only occur once trust has been restored across countries and within countries, i.e. after growth has resumed, unemployment and inequalities have receded, and economies have sufficiently converged. What we are talking about is a new social contract among European countries. This can only be agreed under the veil of ignorance, i.e. under the expectation that participating economies, in their diversity, have comparable strengths and weaknesses. And that is why such a new social contract can only happen at the end of a new convergence process. […]

While I agree with his point about the veil of ignorance, this basically means the eurozone can only be fixed if it is no longer necessary to fix it. (Bernard Connoly made the same point about creating the eurozone in the 1990s: That the common currency would only work well if countries already had stable, non-problematic fixed exchange rates, i.e. if it wasnt necessary.) As of today, it seems he creditor countries (Germany) and the ECB are writing the new “European social contract” and the other nations are passively accepting this rather than seceding.

The challenge of making EMU work is far from over. In fact, we are now just out of the water. Let’s get ready for the bike race and not forget about the running that will come later.

I wonder what the prize will be at the end?


Dont listen to the Blerch!, the senior ECB official said. (Original pilfered fromat The Oatmeal.)

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