PART 4: HOW IS THE EURO WORKING FOR ITS
34. As Mr Jonathan Taylor, Director of Macroeconomic
Policy and Prospects Directorate at HM Treasury, said in his oral
evidence to us:
"The euro has now been
in being for 18 months or so, and while this is certainly long
enough for judgements to be made about some issues it is obviously
not long enough for
deeper seated structural or macroeconomic
changes to have taken place or for those effects to come through
[In addition,] it is quite difficult to disentangle
the economic elements which are a direct consequence of EMU and
the economic elements which are for example a consequence of the
cyclical upswing at the macroeconomic level" (QQ 1 and 3).
Mr Peter Boldt (Senior Economist of the Central Organisation
of Finnish Trade Unions) concurred:
"It is very difficult
to state clearly what is because of the euro, what is because
of EU membership and what is because of globalisation of the economy,
especially of the deregulation of monetary currency movements,
because they interact" (Q 162).
We fully accept these pointsand we would add
the difficulties of disentangling the effects of EMU from those
which the developing Single Market would have produced in any
case and from those of the information revolution.
And it would be premature to seek to reach any firm judgements
while the euro is still used only for banking and business transactions,
until euro notes and coin come into use on 1 January 2001. This
Part of our Report can obviously be based only on the evidence
which is available so far.
WHAT HAS BEEN THE EFFECT OF THE SINGLE
CURRENCY ON THE ECONOMY OF THE EURO-ZONE?
35. In order to inform our inquiry, we commissioned
the preparation of a wide range of relevant statistics. The resulting
tables and graphs are printed as Appendix 3, and are referred
to as appropriate in the text.
36. Growth in the euro-zone has shown strong signs
of revival since January 1999, with real GDP growth of 2.3 per
cent in 1999 and a forecast of 3.0 per cent in 2000
(increasing from 2.1 per cent pa in q2
1999 to 3.8 per cent pa in q2 2000 (year on year)). This includes
strong growth of investment (at an average of roughly 5 per cent
pa over this period,
but relatively slow growth of private consumption expenditure
(roughly 3 per cent pa)
and of government consumption (roughly 1.5 per cent pa)
over the whole of the period. The main contributions to growth
came from consumer expenditure and exports. Both exports and imports
have grown very fast in 2000 (at 13.1 per cent pa and 12.3 per
cent pa respectively in q2).
There has been no "stagflation" dilemma for the ECB
37. As Table 1 shows,
within the overall picture there are variations between countries.
Table 1: Annual percentage change in gross
|Source: ||Eurostat, New Cronos Database: National Accounts, supplemented by Data for short-term economic analysis.
|Note:||Growth rates are measured from the middle of each year.
Ireland's GDP growth has been remarkable over the
last five years, and indeed over the whole decade.
Finland's growth has been very robust, as the country has emerged
from its deep recession of the early 1990s; the Netherlands has
grown steadily; Spain has grown strongly since 1997, and Portugal
a little less so. The growth rates in the "core" participating
Member States of France, Germany, and Italy have on the whole
been rather lower than the growth rates of these countries, though
they have increased in 2000 relative to 1999.
38. The unemployment rate in the euro-zone has been
falling, from 10.9 per cent on average in 1998, to 10 per cent
in 1999, and further in 2000, to 9.4 per cent in March, 9.1 per
cent in June, and 9.0 per cent in August.
The average masks wide variations between countries, with in particular
significant falls in Spain, Ireland and Finland, and relatively
low unemployment throughout in the Netherlands. In addition to
the fall in rates of unemployment, increasing attention has been
given to figures for employmentthe absolute numbers employed
and the percentage of the population of working age employedand
to changes in them. There has been an increase in the rate of
growth of employment in the euro-zone, from 1.6 per cent pa in
1998, to 1.8 per cent pa in 1999, to 2.2 per cent pa (year on
year) in q2 2000.
39. Inflation as defined by the Harmonised Index
of Consumer Prices (HIPC) in the euro-zone as a whole was within
the 0-2 per cent target range through 1999 and until May 2000.
Since then, it has risen above 2 per centto 2.4 per cent
pa in June and July 2000, and 2.3 per cent pa in August 2000.
However, differences in inflation rates between participating
Member States have widened a little. Whereas country inflation
rates in q1 1999 ranged from 2.6 per cent pa in Portugal to -0.1
per cent in Luxembourg, in q2 2000 they ranged from 5.1 per cent
pa in Ireland to 1.6 per cent pa in France.
40. In response to the question forming the title
of our inquiry, "How is the euro working?", Professor
Dr Norbert Walter, Chief Economist of the Deutsche Bank Group,
replied "very well indeed". He pointed in particular
to the acceleration of economic growth after the introduction
of the euro, with foreign demand as one driving force ("supported
by the relatively low euro exchange rate and the momentum of export
markets in Asia, Central and Eastern Europe and the United States"),
and domestic demand as another (with rising real wages and higher
employment raising consumption in the participating Member States).
Price stability was "more or less achieved", with inflation
remaining "subdued" despite the tripling of oil prices
since early 1999. Core inflation (excluding energy prices) remained
at 1.4 per cent in the euro-zone, compared with 2.6 per cent in
the United States (p 122). In a recent press article,
Dr Walter is quoted as saying that "the euro has set off
a chain reaction among the member countries that cannot be stopped.
National borders and national champions, including stock markets,
will soon be quaint notions that belong to the past". Professor
Minford was more doubtful, saying: "We can argue about whether
there are microeconomic benefits from this degree of monetary
integration. Obviously there are macroeconomic policy problems
because the removal of that adjustment mechanism means there has
to be some substitute"; the problem was the lack of an appropriate
alternative mechanism for coping with short run shocks (Q 201).
41. The Governor of the Bank of England (Sir Edward
George) said that growth in the euro-zone had picked up after
a "fairly sluggish" start. Unemployment started at "terribly
high" levels, but had begun to come down. "Core inflation
has really been quite low1.5 per cent or so", though
the impact of oil prices, exaggerated by the weakness of the euro,
had caused recorded inflation to accelerate.
looking at the euro-zone economy I think it is actually not at
all a bad performance; in fact, it is quite a good performance
On the whole I think the evidence is [that] in terms of
the euro-zone [the euro] has been working pretty well" (QQ
258 and 289).
He judged the performance of the ECB to have been
"pretty satisfactory"which he said for a central
banker was "more than faint praise" (QQ 275-277). Professor
Fitz Gerald agreed that growth in the euro-zone as "reasonably
robust", with unemployment falling. Part of this must be
due to the enhanced consumer and investor confidence resulting
from the prospect of price stability, low and stable interest
rates, and prudent budgetary policies (Q 229).
42. Witnesses also gave us their views on how the
euro was working within the individual participating Member States.
The Austrian government considered that "today we can say
that the introduction of the euro and the creation of Economic
and Monetary Union have been an unmitigated success" (p 113),
and the German Ambassador, HE Dr Hans-Friedrich von Ploetz, described
price stability within the euro-zone as "a resounding success"
(Q 294). Others identified a number of benefits for their own
countries which they said were being perceived already, such as
higher growth (mentioned for example by France,
Germany, Italy, the Netherlands); increased stability (Belgium,
Finland, Spain); diversification (Finland);
increased competitiveness (Finland, France, Germany, Italy, Portugal);
increased employment, and labour market reforms (Germany, Ireland,
the Netherlands); increased investment (Germany); and lower inflation
22 A point made by the Dutch Ambassador (Q 337). Back
See Appendix 3, Table 1.4. Back
References in this form are to the relevant quarter of the year
See Appendix 3, Table 8.2-though it slowed in q2 2000. Back
See Appendix 3, Tables 7.2 and 7.4. Back
See Appendix 3, Table 7.6. Back
See Appendix 3, Tables 3.1 - 3.6. Back
See paragraph 157. Back
See also Appendix 3, Table 2.1. Back
Figures for Ireland's GDP are positively affected by the accounting
practices of multinational corporations, but even when this effect
is removed by using alternative measures of economic activity,
such as GNP, the growth rate remains remarkable. Back
See Appendix 3, Table 6.1. Back
See Appendix 3, Table 5.2. Back
International Herald Tribune, 11-12 November 2000. Back
References to France in this paragraph refer to evidence from
Mr Trichet, Governor of the Banque de France. Back
Even though Nokia now accounted for about 20 per cent of merchandise
exports (Q 156). Back