As the austerity-driven crisis chugs on its merry way (for the bankers, at least), we frequently read that the PIIGS* are reaping what they so fecklessly sowed. (Portugal, Ireland, Italy, Greece, Spain, recently joined by Cyprus and Slovenia, SCPIIGS, pronounced “spigs”. I omit Malta due to lack of comparable statistics).
To be specific, by joining the euro these countries enjoyed the benefits of low interest rates derivative from the admirable fiscal and monetary prudence of Germany, borrowing to spend like drunken sailors. Cheap credit, spend-thrift governments and “Bob’s your uncle” (as they say in the UK and increasingly in the USA).
But, actually, no. The countries that joined the euro in 1999 in the flush of optimism did not grow faster than those that remained on the national currency sidelines. The contrary was the case according to the relevant statistics. At the beginning of 1999 eleven countries signed up to the euro, which “went live” at the beginning of 2001, when Greece became number twelve. No other government enlisted until Slovenia in 2007.
Joining the euro involved a prior fixing of the national exchange rate within a narrow band, so it is legitimate to treat 2000-2007 as covering the growth performance of the “original eleven plus one”. Ten European Union countries remained outside the new regional currency. To this ten I add Norway, which despite not being an EU member, has been closely integrated by its membership in the European Economic Area.
These seven years conveniently end just before the onslaught of the Global Financial Crisis of 2008, which allows for a comparison of euro and non-euro growth rates during an eight year boom. During the eight years the euro 12 had an average annual growth rate of 2.8 percent, compared to 4.3 percent of the non-euro 11, a difference of minus 1.5 percentage points. This gap widened as the decade wore on, rising to two percentage points for 2002-2007.
If the question is, “did euro zone countries grow faster than non-euro zone EU countries”, the answer is no, they grew slower. What might be named the euro effect was a resoundingly negative 1.5 percentage points, over fifty percent of the actual growth rate of the 12 euro members.
Annual growth rates for 12 euro zone and 11 non-euro zone countries, 2000-2007
Once the Global Crisis hit the story deteriorated sharply for the euro countries, which numbered fifteen by 2008. In landmark example of the “triumph of hope over experience”, our count goes to 16 with the entry of Estonia in 2011 (the quotation is Samuel Johnson’s judgment on second marriages). From the first quarter of 2008 through the second quarter of 2013, just over five years, the euro 16 had an average annual growth rate of minus 1.1 percent (chart below). Over the same period the non-euro countries, down to seven, grew at plus 0.4 percent, nothing to brag but solidly positive. For these five years the “euro effect” declines slightly, to minus 1.1 percentage points.
Annual equivalent growth rates by quarter, 16 euro and 7 non-euro countries, 2008Q1 – 2013Q2
The growth gap is only part of the story, as closer inspection of the 2008-2013 chart shows. During 2008-2009 the governments of the large euro countries responded to the severe downturn with fiscal expansion (aka, “stimulus”). This fiscal expansion provoked a rapid recovery in the second half of 2009. In mid-2010 fiscal expansion came to a screeching halt, replaced by fiscal cuts (aka “austerity” or “fiscal consolidation”). As a result, average growth for the 16 euro countries collapsed, from plus 2.2 percent in late 2010 to minus 1.5 percent three years later. The euro countries declined and the non-euro seven followed them down, albeit not to the same austerity-induced depths. In Britain, the largest of these non-euro decliners, the right wing government implemented its own “austerity” policy. With the United Kingdom excluded, the non-euro average rises from +0.4 to +0.6.
Meanwhile, “across the pond” the Obama administration continued an ever-decreasing fiscal stimulus. Mild and inadequate as this was, it kept the US growth rate well into the positive range and astronomical compared to either the euro zone dwellers or the non-euro outsiders (the US rate is the dotted line in the chart above). The Obama stimulus began to show effect in the second half of 2010. From then until now the difference between growth of the non-euro 7 and the United States averaged minus one percentage point. This we might name the “austerity-contagion effect”.
The euro was not an intrinsically bad idea. Initiating it when the German government shifted into a mercantilist economic policy guaranteed that it would be growth depressing well before the Global Crisis hit.* When the Troika, led by the German government and the Bundesbank (sorry about the redundancy), responded to the Crisis with draconian austerity, membership in the euro became a disastrous liability.
So, what should the governments of the euro countries do in order to escape the downward spiral in which they have plunged their populations?
Think of it this way. When you come to the end of a cul de sac, how do you get out?