Do you want euros with that?

The relative performance of the bigger EU countries in terms of GDP per capita has been interesting over the period 2006  to 2017 (i.e. from just before the financial crisis. ) If we look at the average for the EU-28 as a whole (100), only Germany has managed to increase its relative position, rising from 116 in 2006 to 124 in 2017. By contrast, Spain, France, Italy, and the United Kingdom, have seen a fall in their GDP per capita relative to the average. Actually, Spain and Italy have moved from an above-average position to a below-average position: in other words their per capita GDP in purchasing power parities is now below the average for the EU-28. The UK has seen a decline from 116 to 110 but it is still above the EU average.

It’s also interesting to look at some of the outsiders, not part of the EU. Switzerland, for instance was already in a very strong position in 2006, with  income per capita at 150, i.e. 50 per cent above the average income in the EU-28. The US in 2006 was even better off at 155. However, between then and 2018,  Switzerland did even better rising to 160 but the US fell back to 141. Finally, Japan which was at 110 in 2006, has fallen to 99,  in other words below the average income in the EU, which is rather remarkable.



GDP per capita in PPS
Index (EU28 = 100)
Data from 1st of December 2018. (Source Eurostat)


In 2006 the euro area (18 countries) was above the average for the EU as a whole, at 109, and the UK higher again at 116. However by 2018 the positions had reversed. The euro-area had fallen to 106 while the UK had fallen further to 105. In other words, people in the UK used to be better off than people in the eurozone. And now they’re worse off. Maybe if the UK had joined the euro, it might have done better.

If the UK leaves the European Union, it may not be forever. A change of government, and a change of heart, and, perhaps, economic realities in the UK, may after some years cause opinion to shift and the UK to reapply for membership. In such a situation, however, there won’t be much enthusiasm on the EU side for all the opt-outs that the UK had secured in the past, whether for budget rebates , abstaining from the Schengen agreement, or for staying out of the euro.

More prescriptions for the euro

“Handelsblatt” is a daily newspaper published in German in which is really very good. It gives a comprehensive coverage of German and international business news and issues. On its website, it also has something called “Handelsblatt Today”, which gives some material in the English language. It had a piece recently about the euro, entitled “The euro must be fixed or dropped”. This is heavy on assertions and light on facts, apart from a reference to Alexander Hamilton and the federal takeover of state indebtedness at the formation of the United States of America.
“To survive in the long term, the euro zone needs at a minimum: the ability to tax and spend, combined with balanced-budget laws in member states; automatic stabilizers such as unemployment benefits for the whole currency area; and joint deposit insurance for banks”.

Well, the eurozone is a subset of the EU, and the EU has already some ability to tax and spend. Balanced-budget laws would be too restrictive, fetishizing a particular 12-month period: instead we have had the Stability and Growth Pact, excessive deficit procedures and so on. Unemployment benefits for the whole of the euro area are not necessarily an obvious requirement, because cultural and language differences have militated against a single labour market in the EU, and social services and public health systems are stronger than in the United States. Finally, although there is a long way to go, joint deposit insurance for banks is under consideration by the Council. But there are national schemes in place, and it’s not clear that the absence of a wider scheme is essential for the euro zone to “survive in the long-term”.

Italy and the euro

The formation of a new populist government in Italy is getting a certain amount of attention from commentators. The Süddeutsche Zeitung outlines growing worries in Brussels and Bonn that the new government will threaten the stability of the EU through questioning its fiscal rules and in particular may hinder further eurozone reforms. The Neue Züricher Zeitung highlights nervousness among Italy’s creditors and the uncertainty over how much confrontation there will be between the new government and Brussels . Le Monde concentrates on the personalities and backgrounds of the two party leaders concerned, but the Wall Street Journal gives it little coverage, saying “European stocks climb as Italy tensions ease for now”. In the UK, the Telegraph has an article headed “As Italy has shown, the euro is a far bigger threat to Europe than Brexit” from a former Conservative party leader and foreign minister. The Financial Times focuses on the potential prime minister of Italy and the constitutional constraints on radical change.
What will happen? Hard to say exactly, but the most unlikely thing of all is for Italy to leave the euro. First of all, Italians, having had the euro, will not want to move to a currency nominally at least under the control of domestic politicians. Secondly, Italy is not in the G-7 by accident: it has a huge range of sophisticated businesses who are well able to see that the costs of leaving would be enormous and well outweigh any benefits.