The problem is that the euro is blamed for many things that are not actually the fault of the euro. How many times have you heard that the single currency has condemned a quarter of the Spanish population – and half of its young people – to unemployment? And how often do we come across the claim that Italy has not grown since it joined the euro?
The first claim is blatantly untrue, the second one highly misleading. Spain’s high rate of unemployment is not due to the single currency. If that were the case, other countries equally badly hit by the financial crisis and the bursting of housing bubbles, such as Ireland and Portugal, would be facing similarly eye-watering rates of joblessness. But they are not. Their unemployment rates are a third to half of the Spanish rate.
Nor are such rates unprecedented in Spain. As recently as 1994, joblessness reached 24.66 per cent of the population, and the symbolic 25 per cent mark had previously been surpassed in the late 1970s. Even at the height of the housing boom, the rate stood at 8-10 per cent, double the UK rate over the same years.
The problem of Spanish unemployment is structural. Hiring and firing is expensive, social security contributions are among the most onerous in Europe, and the education system is old-fashioned and of poor quality. Not only do these policies mean that unemployment is consistently higher than in peer countries in both boom and bust times. There is also an upward elasticity in recessions, meaning joblessness rises disproportionately when crisis sets in. Hence the jump from 8 per cent in 2007 to over 20 per cent in 2010.
The notion that Italy’s stagnant economy is primarily – let alone exclusively – a result of euro membership is equally implausible. To begin with, Italy has lagged behind its OECD and EU peers since the early to mid-1990s, a full decade before the introduction of the euro. Furthermore, studies of the Italian economy have repeatedly shown that its deficiencies lie primarily on the supply side, with hugely burdensome administrative processes, heavy taxation, onerous product and labour market regulations and uncertainty regarding the protection of property rights. As Martin Sandbu from the FT shows, Italy’s problems are of a domestic, not monetary, character.
Similar arguments apply to other Eurozone laggards, from France – its structurally high unemployment rate driven by a byzantine labour code – to Portugal – burdened by red tape inherited from its dictatorship and subsequent socialist governments.
The one outlier in the discussion is Greece, where it does appear that euro exit could ease economic recovery. That is not because of any inherent flaw in the euro, but rather because the degree of internal price devaluation needed for Greece to recover has proved hard to achieve so far, given the rigidity of product and labour markets and large share of the state in GDP. But even in Greece, the reasoning assumes that the reforms needed would happen after its exit from the euro, which is unlikely if Syriza is given free reign over economic decisionmaking. That is part of the reason why Greeks are overwhelmingly against euro departure – that, and the hyperinflation that would be sure to follow Grexit.
And this is a crucial point that Eurosceptic analyses of the southern Eurozone miss. These economies were plagued by high inflation before the single currency, which led to the erosion of savings and pensions, and the misallocation of resources. The euro put a decisive end to this inflationary bias by national central banks and spendthrift governments. Brexiteers now like to claim that the euro is to blame for the economic malaise in these countries. Those who do are either misinformed or intellectually dishonest.
Diego Zuluaga is the IEA’s Financial Services Research Fellow and Head of Research at EPICENTER.