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The Eurozone’s Agenda in 2013

PARIS – European Union leaders concluded 2012 with a landmark agreement that places all eurozone banks under a single supervisor. But the difficult negotiations that led to the agreement eclipsed European Council President Herman Van Rompuy’s recent report, Towards a Genuine Economic and Monetary Union, which calls for unity far beyond a banking union. Although “no door was closed,” in the words of European Commission President José Manuel Barroso, EU leaders have clearly refused, at least for now, to hold a serious discussion about deeper integration.

Van Rompuy’s report raises a fundamental question: What factors are preventing the eurozone from functioning as everyone would wish? Answering this question requires, first and foremost, comparing the dynamics at play during the euro’s first decade, 1999-2009, when the eurozone ostensibly performed well, with those of the last three years, which have been marred by crisis.

At first, the eurozone seemed to function like a true currency union: capital-market integration was accelerated; cross-border activity increased; and the per capita income gap between member countries decreased. But, unlike in a complete currency union, such as that of the United States, eurozone members retained full financial sovereignty, meaning that they controlled all of the levers of macroeconomic policy.

Without external constraints, public and private expenditure grew precipitously in many countries on the eurozone periphery, while wages rose faster than productivity. As these countries posted current-account deficits, northern European countries accumulated current-account surpluses, exposing a widening competitiveness gap.