Growth decelerated in several European countries before the launch of the euro in 1999; some countries had persistent problems with their public finances and the single currency was a continuation rather than a structural break in trade patterns with fixed rates likely to result in widening trade imbalances.


Wolfgang Münchau, the Financial Times columnist, writes today on what he terms "two catastrophic errors committed during the 1990s and at the beginning of this millennium. The first was the introduction of the euro; the second, the EU’s enlargement to 28 members from 15 a couple of decades ago." He adds:

Why was the period from the 1950s to the late 1990s more stable compared with the period since? In the first years of the then European Economic Community, the external security risks were taken care of by Nato. There were almost no risks to financial stability because regulation was extremely stringent by today’s standards. While the economic shocks, such as the oil and inflation crises of the 1970s, were no less severe than today, EU members had the ability to absorb them through flexible exchange rates. Today Brussels suddenly has to look after its own foreign policy interests and run the world’s second-largest economy. The EU is not institutionally ready for either job. And its leaders are intellectually not ready either.

In 1989 the opposition of Margaret Thatcher, British prime minister, to German reunification gave François Mitterrand, French president, an opening to demand the support of Helmut Kohl, German chancellor, for the launch of a single currency. A year before in 1988, Jacques Delors of France, the European Commission president, had set up a committee of central bankers plus himself as chairman, to explore the issue of a common currency.

The collapse of communism in Europe and the decision of the Communist Party of China to significantly accelerate the pace of reforms coupled with a change of economic policy in India, resulted in a doubling of the global market workforce to 3bn by 2000.

Data from Angus Maddison (1926–2010), the late renowned British economic historian, show why the period 1950-1973 is regarded as a Golden Age for growth in Western Europe as countries recovered after the war years with labour in plentiful supply. Italy grew at an annual average of 5% — the same rate as West Germany. Monitoring the World Economy (1995, OECD, Table 3-1) 

Greece grew at a blistering pace of 6.2% per annum in the period 1950-1973 and by 1970, its real per capita GDP in the (future) EU15 exceeded that of Spain, Ireland and Portugal.

A commodity price boom in the early 1970s and then after the outbreak of the Oct 1973 Arab-Israeli War, Arab members of the Organization of Petroleum Exporting Countries (OPEC) imposed an embargo against the United States in retaliation for the US decision to re-supply the Israeli military. The price of oil shot from $3 per barrel to $12 and in 1975 the CPI (consumer price index) in Ireland rose a stunning 19% and the GDP deflator jumped by 22%. A year later in Sept 1976, Denis Healy (1917-2015), UK chancellor of the exchequer, was about to board a flight to Hong Kong for a finance ministers' meeting when he decided to head back to Downing Street to request a bailout loan from the International Monetary Fund (IMF). According to the Financial Times "Healey later claimed that the Treasury had grossly overestimated the public sector borrowing requirement, the key figure used during the IMF crisis, and that if he had been given accurate figures, he would not have had to ask for the loan. He also said that accepting the IMF’s strictures was a 'Pyrrhic defeat,' forcing him into the proto-Thatcherite fiscal stringency he wanted to practise anyway."

The price was austerity on a grand scale: the Fund demanded £2.5bn cuts in government spending in return for a $3.9bn loan and Healey announced searing cuts in an emergency budget in Dec 1976 that won a Sun tabloid headline — “Britain’s Shame.”

The spending cuts triggered strife and strikes that helped to sweep Margaret Thatcher (1925-2013) into Downing Street in May 1979 and that same year witnessed another Arab oil embargo that in 1980 helped Ronald Reagan (1911-2004) capture the White House.

It appeared to be the end of Keynesian economics but in the US while there were tax cuts, there was also a big rise in defense spending.

In 1979, West Germany's exports of manufactured goods were double France's level. In 1988, 44% of the British trade deficit was with West Germany. In 1981/82, 40% of the deteriorating French trade balance was related to West Germany.

The early 1980s were bleak with recessions in the US, UK, Ireland and many other countries.

Wolfgang Münchau, in his piece today underestimates the turmoil that followed the end of Europe's Golden Age of growth

Greece had the best economic performance as measured by annual economic growth, across the continent of Europe in the period 1950-1973 but from 1974 the economy has had long periods of weak growth and an annual budget deficit every year from 1974 to 2014.

France has not managed to balance its annual public finances in any year since 1975. Italy has not achieved a budget surplus in any year since 1945.

IMF data show that in the 1980s, average annual real GDP growth in Italy was 2.1%; it dropped to 1.4% in the 1990s, 0.6% in the first decade of this century and has averaged -0.5% since 2010.

Irish average GDP growth was at 3.1% in 1950-1973 compared with Spain at 5.8% and Portugal at 5.7%.

Greece had about 40% of the workforce in self-employment coupled with a significant informal sector, and the official unemployment rate averaged 2.3% in the 1970s, 6.6% in the 1980s, and 9.0% in the 1990s. It exceeded 11% in 2001 when Greece joined the euro and fell as low as 7.5% in 2008.

The general government budget balance in Greece was at an average surplus of about 1% of GDP in the 1960s; from 1974-1980 the annual deficit was below 3% of GDP. The deficits averaged 9% of GDP in the 1980s and peaked at 16% in 1990  similar to the revised level in 2009.

In 1973 the Greek public debt to GDP ratio was almost 17% and it rose steadily from about 27% of GDP in 1979 to 111.6% in 1993. It exceeded 100% when Greece joined the euro system in 2001 compared with the Euro Area rules maximum 60%. Italy and Belgium had debt in the same range when they adopted the single currency two years before. 

In respect of Balance of Payments, Greece ran small current account deficits which were on average about 2% of GDP up to 1973. These small current account deficits were made up of large deficits in the trade balance (about 7% on average) and significant surpluses (about 5% on average) on the income and transfers accounts, mainly reflecting remittances from Greek seamen and emigrants.

The public debt ratio in France in 1974 was 22% and it is now close to 100%.

The Kingdom of Italy began with a public debt ratio of 37% and the average ratio was 91% in the period to the eve of the First World War. Second World War hyperinflation cut the debt ratio to 25% of GDP in 1947 — the all-time record low since 1861 and Italy's gross public debt ratio was at 133% of GDP in June this year — the second highest in the European Union, trailing only Greece.

In its 154 years as a unified country, Italy has had a debt-to-GDP ratio below 60% in less than 30 of those years.

The annual Italian budget deficit was typically in low single digits up to 1973 — 3.74% in 1951; 1.38% in 1961 and 4.32% in 1966.

Economists at the Banca D'Italia in a 2002 paper said:

For about 25 years, from the mid-sixties to the early nineties, Italy ran unsustainable fiscal policies. High deficits, stemming from persistent primary imbalances, fuelled public debt accumulation. In 1994 the debt reached 124% of GDP. Over the same period, future pension liabilities gradually increased to about 400% of GDP. Fiscal policy and rapid population ageing set public finances on an unsustainable path, with large generational imbalances and perspective deficits.

Rising government spending was not matched by revenues and in the 1980s as in Greece, annual Italian deficits rose to double-digit rates — in 1987 Italy had a deficit ratio of 12.6% compared with 2.7% in the UK and France and 1.5% in Germany.

The average Greek deficit was at 16% in 1980/1989 with debt servicing at 8%, resulting in a primary deficit of 8%.

In 1990-1995 during the genesis of the euro project, France's sovereign debt as a ratio of GDP surged by almost two-thirds.

The Italians took advantage of the Basel I agreement, which went into effect in 1990 and provided additional leverage for countries that wished to expand debt as the new rules for banks lowered to zero the   capital requirement on sovereign debt — no matter how risky.

In Italy in 1991 the primary balance (excluding debt servicing) returned to surplus for the first time since the mid-sixties and in the second half of 1992, reform was accelerated by the European exchange rate crisis which forced the lira to leave the exchange rate mechanism.

Annual Italian debt servicing was at a huge 12.5% of GDP. The interest cost fell to 5% of GDP in 1998-2007. 

Some of the countries have had double-digit youth unemployment rates for decades.

Both Greece and Italy have had poor inward foreign investment records for decades.

The Mezzogiorno's (Southern Italy) employment rate (15-64 year olds) was at 41.9% in 2014 — the lowest of any region in the European Union.

The Mezzogiorno accounts for 36% of Italy's population; about 23% of national GDP and 11% of exports; almost 62% of the population in the Mezzogiorno earned less than €12,000 in 2014 compared with 28.5% of the workforce in the Centre/Northern regions; the region has the lowest birth rate since 1862.

World economic history share of big countries

Michael Cembalest of JP Morgan produced this chart in 2012. Note that the first increment of time is 1,000 years followed by 500
years; then increments of 100 years, 80, 30, 20, one of 13 years and 27 years. It ends with a few decades and an eight-year increment.


Eurozone countries like Italy, Spain and Greece have had trade deficits with Germany since at least 1980 - 20 years before the euro launch.

In 1980 when Greek public debt to GDP was at 30%, trade was almost in balance. Since then the value of German imports from Greece hardly changed until 2005 while exports from Germany quadrupled.

In 1980, Germany's exports to Italy as a ratio of imports was 111%; in 2010, it was 130%.

Over the past hundred years, the German economy only during the Hitler regime (1933-45) did not rely on exports. Between 1910 and 1913, exports accounted for 17.8% of Germany's GDP. Their share declined to 14.9% in the second half of the 1920s and fell to only 6% in the second half of the 1930s, but by 1950 accounted for 9.3% of West Germany's GDP. Once the postwar economic boom got under way, exports rose to 17.2% of GDP in 1960, to 23.8% in 1970, to 26.7% in 1980, and to approximately 33% in 1990.

The German ratio was 45.6% in 2014 compared with France's 28.7% and Italy's 29.4%.

In 2014 the three countries Germany, France and Italy accounted for 65.2% of Euro Area GDP (gross domestic product) and the future survival of the single currency is dependent on this troika.

Germany accounted for 28.7% of GDP; France 20.7% and Italy 15.8%.

Germany has posted a merchandise trade surplus every year in the period 1952-2014 and a continuous goods and services surplus every year since 1993; World Bank data show that France has had a combined trade deficit every year since 2005 while Italy posted a deficit every year in the period 2005-2011 — Italian surpluses since reflect both a rise in exports and a plunge in imports as the economy shrunk.

Germany has been able to maintain a positive merchandise trade balance over six decades, irrespective of exchange rate movements.

The German export engine is boosted by the structure of firms — it has a higher ratio of medium and large firms than the other big countries and it has many more exporting firms than the other big economies in Europe — based on recent data, the population ratio per exporting firm is 187 in Denmark; 236 in Germany; 550 in France and 1,150 in Ireland.

Germany also out-trades the US in manufacturing innovation while pay in the sector is the highest among the big manufacturing nations — see here for more detail on these issues.

In 2010 an IMF working paper with Helge Berger, then deputy director of the Fund's European Department, concluded that:

imbalances in trade among euro area member countries have widened markedly after the introduction of the common currency. This increase went along with a higher degree of persistence, which appears to lengthen the impact of shocks on external accounts. These findings are in line with additional observations that imbalances tend to be lower among trade partners with a flexible nominal exchange rate and that bilateral trade surpluses are decreasing in the real exchange rate, which will move more slowly in the absence of nominal exchange rate flexibility.

European Commission research in 2012 concluded:

An increase in German demand would mainly benefit the exports of its closest trade partners, such as the neighbouring economies. Since a 1% increase in German domestic demand will primarily benefit domestic production, its effect on the German trade balance will be lower: it amounts to roughly 0.2% of GDP. Other countries' trade balances will benefit through increased exports of goods and services...The overall improvements in trade balances are thus the strongest for the Czech Republic with close to 0.1% of GDP, followed by Slovakia, Hungary, Austria, and the Netherlands. The exports of the euro area deficit countries would increase by considerably less and the effect on their trade balances would be more muted: the trade balance of Spain, Italy and Portugal would improve by around 0.02% of their GDP, and the Greek balance even less.

Greece is Europe's worst exporter and that is partly related to its very poor record in attracting foreign direct investment (FDI). Italy also has a poor record.

Prior to the financial crisis, traditional industries such as shoemaking and textiles encountered competition from China while since 2004 former European communist countries have provided more competition.

Marco Annunziata, an Italian economist, commented in 2012:

Implausible as it sounds, Italian voters have put up with an average youth unemployment rate of 30% for the last 40 years; Spanish voters with a rate of 32%. Italy experienced 'strong' economic growth during 1994-2000, with GDP rising at an annual average of 2%. During this boom period, the youth unemployment rate still averaged 33%. In other words, one young person in three was unemployed when the economy was at its strongest. The rate never dropped below 20%. Spain’s economy grew at an average of 3.6% between 1995 and 2007. During this impressive run, the youth unemployment rate averaged 28%; it was below 20% for just three years, with a 'best performance' of 18% in 2006.

Fast economic convergence is a myth in Europe and in emerging economies

High EU youth unemployment rate not as bad as it seems

Italy posts annual budget deficit every year since Second World War

Italy's Mezzogiorno is Achilles' heel of Euro Area - lowest birth rate since 1862

Budget surpluses rare in developed countries from 1980s; Italy, France, Greece had none in 60 and 40 years

Golden Growth: Restoring the lustre of the European economic model World Bank, 2012.

Pic on top: Angela Merkel, German chancellor, in Beijing 29 Oct, 2015, en route to the State Guest House. Photo: German government information service

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