Abstract
The COVID-19 crisis has the potential to lead to long-term stagnation in the European Monetary Union (EMU). Especially the following challenges can be identified: a lack of labour market institutions can lead to nominal wage cuts and deflation; the lack of a strong fiscal centre can lead to an insufficient long-term stimulation after the COVID-19 recession; high levels of debt and non-performing loans can hamper growth; the insufficient real convergence can add to political destabilization. The Great Depression in the 1930s and the long-term stagnation in Japan after the asset market bubble in the 1980s support these arguments. The European Central bank, as the only powerful supranational institution, follows overall a good policy but one that is not sufficient to stabilize a monetary union. A more comprehensive integration of the EMU is needed to prevent the danger of its breakdown.
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Notes
- 1.
The development of GDP in Ireland is strongly linked to the location of European headquarters of multinational companies, which are primarily settling in Ireland for tax reasons (cf. Joebges 2017). Luxembourg is also a tax haven.
- 2.
This group covers persons with an equivalised disposable income below 60% of the national median of equivalised disposable income and persons with material deprivation.
- 3.
The rule allows public debt to finance public investment.
- 4.
With D as government debt, ΔD as budget deficit (net borrowing) and ΔGDP as change in GDP, the debt stock ratio (b = D/GDP) by definition does not change if government debt and GDP grow at the same rate: ΔD/D = ΔGDP/GDP. Dividing the left side of the equation in the numerator and denominator by GDP, defining a = ΔD/GDP as the deficit ratio and g as the growth rate of GDP, yields a/b = g and b = a/g, respectively. Growth of g = 3% allows a deficit ratio of a = 3% without the debt ratio b increasing. If GDP growth is 5%, the deficit ratio may be 5% so as not to change the debt ratio.
- 5.
- 6.
In the USA, nominal wages began to rise again slightly from 1934. This was undoubtedly due to the policies of Roosevelt, who was in charge of the government from March 1933. He tried to stabilize wage development with several measures. The National Industrial Recovery Act obliged companies to agree to “codes of fair competition”, the Social Security Act created the first basic social safety net in the U.S. the National Labour Relations Act granted workers the right to organize and bargain collectively as well as prevent them from unfair labour practices, the Fair Labour Standards Act introduced a minimum wage, maximum work hours and banned child labour.
- 7.
Private debt in relation to GDP rose in France from 164% at the end of 1995 to 203% at the end of 2007 and 266% at the end of 2018; for Germany the corresponding figures were 149, 162 and 154%, for Greece 49, 115 and 128%, for Italy 123, 167 and 165%, for Portugal 160, 278 and 247% or for Spain 129, 276 and 198% (cf. OECD 2020).
- 8.
Non-performing loans and advances as share of loans and advances.
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Heine, M., Herr, H. (2021). European Monetary Union and the COVID-19 Crisis: A Tightrope Act with the Risk of Falling. In: Caetano, J., Vieira, I., Caleiro, A. (eds) New Challenges for the Eurozone Governance. Springer, Cham. https://doi.org/10.1007/978-3-030-62372-2_2
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