Eight years after the launch of the euro, citizens in the 13 states using the common European currency are enjoying the fastest growth in six years, lots of new jobs, very low inflation and low interest rates. By many measures, that looks like a huge success. Yet the picture masks persistent and troublesome national differences.
France is losing export share. Wages have stagnated in Germany. Italy has gone in and out of recession and Portugal's budget deficit soared. In contrast, growth has boomed in Ireland and Spain.
In France, presidential candidates have complained the European Central Bank pays too little attention to growth and the Socialist candidate Segolene Royale has proposed changing the ECB's mandate to a twin one of growth and inflation.
Worried that the eurozone could be drifting apart into winners and losers, the European Parliament's Economic and Monetary Affairs panel holds hearings this week on the matter. Stephen King, HSBC global economist, said even if the ECB cannot address growth and inflation differences among eurozone countries, they ignore them at their peril.
"Whether we like it or not, the ECB cannot easily act in a political vacuum," said King on the ECB Shadow Council's blog (http://shadowcouncil.handels-blatt.com). "Would its independence be threatened by ever-greater divergence? How strong is the political glue that ultimately binds European monetary arrangements together?" he asked.
ECB Executive Board member Lorenzo Bini Smaghi struck back on Tuesday, defending the ECB's success in controlling inflation as the best recipe for delivering solid growth for the region: "The bottom line is there is no need for change," he said.
ECB President Jean-Claude Trichet, Eurogroup President Jean-Claude Juncker who is prime minister of Luxembourg, and EU Monetary Affairs Commissioner Joaquin Almunia will be asked to address these questions at the hearing on Wednesday.
Raw facts point to monetary union as an economic success. European capital markets have grown, making financing cheaper and easier to get, boosting GDP. Deutsche Bank estimates that business cycles are more harmonised among states since launch of the euro in 1999 and intra-regional trade risen by 40 percent. This suggests that a one-size-fits-all monetary policy is better suiting the region today than it did in 1999.
Moreover, inflation differences have narrowed. The ECB calculates the inflation gap has tumbled from 6 percentage points in the early 1990s to less than 1 percentage point by the early 2000s and held steady at that rate since then. The United States has a similar variation in regional inflation rates.
As for growth differences, they have changed little since the euro's launch, holding at around 2 percentage points seen since the early 1970s. That gap is slightly less than the one seen among the 50 United States, the ECB says.
Half the eurozone countries have actually enjoyed faster growth since they adopted the euro than they saw in the prior six years, ECB data show. Only in Portugal has growth slumped below the eurozone average and below pre-euro growth rates.
Eric Chaney, European economist for Morgan Stanley, said there is a lack of evidence to support the case that eurozone nations have done worse under the single currency.
"I don't think there is an economic issue here," he said. Rather there is a political issue, he said. Politicians are blaming the ECB for national problems, when in fact all the euro has done is to expose underlying national flaws, he said.
"When you are sharing the same currency, differences become highly visible. But the currency itself is not the reason. "It is like taking a photograph and putting it into the developing tank. With the same currency, you immediately see the (national) picture emerge," he said.
And it is not always a pretty one. France for example has seen its share of exports to countries outside the euro area drop by about 17 percent since 1999, according to Morgan Stanley. German exports have surged by a similar amount, suggesting that Germany has grown more competitive, robbing business from French firms.
Willem Buiter, economics professor at the European Institute of London School of Economics, called it "laughable economic ignorance" for a country to blame the ECB for its problems. The central bank can only set policy for the aggregate region, not for one country. And talk of changing the ECB's mandate to force more attention to growth is unrealistic, since it would require agreement of all 27 EU countries, he said.
"It's not a credible threat. It's like a little boy threatening to hold his breath until he pops, no worse." Philip Lane, economics professor at Trinity College in Dublin, agreed. "The ECB cannot respond. Politicians should focus on national policies and stop looking for an external solution," he said.
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