Although the International Monetary Fund (IMF) would not frame it this way, its recently released report on the eurozone economy provides data that have to raise questions anew about the wisdom of having introduced the euro in 1999 as a single currency for such a diverse group of countries. More troubling yet, the IMF report has to raise questions about the euro’s long-term survivability.
Among the troubling data in the IMF’s recent report is the fact that sovereign debt levels in a number of highly-indebted eurozone countries, like Greece, Italy and Portugal, are higher today than they were at the start of the eurozone sovereign debt crisis in 2010. This has to raise questions as to how sustainable this debt will be once the European Central Bank stops buying European sovereign debt and starts normalizing European interest rates.
{mosads}It also highlights how vulnerable these countries might be to another economic recession, which would further raise these countries’ debt-to-GDP ratios beyond their already excessively-high levels.
Of greater concern yet is the divergent income and productivity performance among eurozone countries to which this report points. It has to be of serious concern that over the past eight years, income growth per capita in the high-productivity countries in the eurozone’s North has increased at an annual rate of 0.5 percent at a time when income growth per capita in the low-productivity countries of the eurozone’s South has declined by 0.5 percent a year.
Continuation of such divergent trends will only heighten the political tension that already exists between the eurozone’s North and South, which in turn would heighten the risk that the eurozone might fracture politically.
The real Achilles’ heel of the eurozone to which the IMF report points is the very divergent long–run labor productivity performance between Germany, the eurozone’s largest economy, and Italy, the eurozone’s third-largest economy. Whereas, since 2000, Germany’s unit labor costs have steadily declined by a cumulative 15 percent, those in Italy have increased by a cumulative 10 percent.
This very divergent productivity performance between the two countries would seem to go a long way to explaining why Germany’s economy is now almost 10-percent above its pre-2008 crisis peak, while Italy’s economy remains some 6-percent below its pre-crisis peak.
Sadly, there is every prospect that Germany’s productivity performance will continue to outstrip Italy’s in the years ahead. The Italian government is already backing away from Matteo Renzi’s labor market reforms at a time that the rise of populism — in the form of the Five Star Party — could lead to a very ineffective Italian government after next spring’s Italian parliamentary elections.
Were that to occur, Italy would not put an end to the sclerotic economic performance that has characterized it over the past two decades, which would mean that there would be little chance that the country would grow its way out from under its public debt mountain.
All of this has to raise the most basic of questions: How much sense did it make in the first place to have a common currency for a productivity powerhouse like Germany and a country like Italy that has time and again proved that it is seemingly incapable of reforming its economy?
One also might ask, how long is the Italian public likely to put up with being stuck in a euro straitjacket that precludes it from devaluing its currency to restore competitiveness and that condemns the Italian citizen to a continually-declining standard of living?
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.
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