Why the euro area needs new convergence goals
After economic performance in euro member states initially converged, the trend reversed with the introduction of the euro in 1999. Yet for the euro area to survive, it needs to reduce imbalances across member states. This is the result of a new study by the Bertelsmann Stiftung and the Jacques Delors Institut – Berlin.
The start of the European Economic and Monetary Union marked a turning point: While economic performance in euro member states had converged since the Single Market programme in the mid-1980s, the trend reversed with the introduction of the common currency in 1999. Convergence has fallen since then.
Yet for the euro area to survive, it needs to reduce imbalances across member states. This is the result of a new study by the Bertelsmann Stiftung and the Jacques Delors Institut – Berlin. The study shows which kind of convergence the euro area needs and proposes simpler rules and indicators for a renewed convergence process in the monetary union.
Convergence is an essential ingredient for the success of the euro. The single monetary policy cannot operate effectively if the economic conditions in member states differ too strongly. For this reason, further policy action is needed to enhance the convergence process.
The original convergence criteria of Maastricht and the Stability and Growth Pact are too narrow to capture and monitor the imbalances in the euro area effectively. The Macroeconomic Imbalance Procedure that was introduced in 2011 is too complex to be taken seriously by the member states.
The study therefore calls for three simple rules that should be at the heart of a new convergence process:
Convergence in price stability, measured as inflation differentials from the euro area average
Convergence in competitiveness, measured on the basis of nominal unit labour costs
Convergence in the external balance, measured on the basis of the levels of external surplus or deficits
More convergence alone will not resolve all of the design flaws of the euro area. But it is a necessary building block for a better functioning of the euro and the pre-condition for future reforms.
The complete study can be found on the right-hand side.
The study will be presented in Berlin on 3 December 2015 on the occasion of the conference “Which convergence for the euro area?” Further information about the event can be found here.
This publication is part of the joint research project by the Bertelsmann Stiftung and the Jacques Delors Institut – Berlin, “Repair and Prepare: Strengthen the euro“. Please visit our website for more information and other publications on reforming the euro area.