Last January marked the 20th birthday of the euro, launched in January 1999, and so it is a good time to consider whether the euro is doing any good to the citizens of the EU from whom it was created.
Economists may debate the overall value of the euro for regional policies, but it is clear that the individual EU citizen hasn’t gained much with the introduction of the single currency.
If you ask my cousin in Amsterdam about it, he’ll simply tell you that many things have become more expensive with the euro. A Dutch comedy show used to depict the president of the Netherlands central bank going to the supermarket and saying, “Boy, milk is expensive. That damned euro…” This was particularly amusing while the Dutch central bank poured out reams of literature touting all the advantages everyone was enjoying thanks to the single currency.
If you ask my friend Prodromos, who today runs a café in Nicosia, Cyprus, he will use some unprintable expressions. Until the financial crisis in Cyprus that rocked the national economy in 2012, Prodromos was the head of one of the largest food companies on the island. During the crisis, the European Central Bank (ECB) mandated a one-time bank deposit levy on all uninsured deposits in the country’s two largest banks, and it cost Prodromos the two million euros he had on deposit at one of them. Prodromos blames the easy money culture initiated by low interest rates and unregulated lending that the euro brought in.
The simple fact is that the inception of the euro did not drive an increase in overall inflation – there is a vast economic literature to support this. What did drive, however, is an increase in prices in a relatively small basket of good, but these goods, like milk, were the ones most needed by European households (see this paper and many others that make this point).
Meanwhile the “gilets jaunes” movement in France gives voice to just how widespread discontent has become – much blame is placed on the euro, and there have even been reports of a bank run planned to protest against it. The “gilets jaunes” started protesting when benzine prices rose – so it is indeed all about frustration with the French economy.
Stability? Increased Purchasing Power?
Some say that the euro has brought stability and increased purchasing power to the Eurozone.
As for stability, let’s look at consumer confidence across Europe. In January, consumer confidence hit a two-and-a-half year low. But consumer confidence has fizzled in Europe at least since the 2008 financial crisis. While the ECB may indeed have pursued policies that led to a recovery in Europe, the lot of the consumer, who is bombarded with bad economic news, and who sees no change in the near future, is not a happy one.
The EU hasn’t worked out any clear forward-looking economic policies, as Aidan Regan, a political science professor at University College in Dublin points out. This leaves the European consumer with no clear view of things improving – hence the consistent low level of consumer confidence across the Continent. Is this ‘stability?’
Further, a look at Comparative price levels in Europe also suggests that the euro isn’t helping the European.
Comparative price levels are defined as the ratios of purchasing power parities (PPPs) to market exchange rates in each country. They give a measure of the difference in cross-border price levels by indicating for a given product the number of units of the common currency needed to buy the same volume of the product group in each country. They are calculated with the European average at 100.
Nearly every country in developed Europe, including Cyprus and Malta, has a price level that is above or close to 100, meaning that buying goods and services is relatively expensive for consumers in that nation.
A survey by researcher Nielsen shows that discontent is rising. “Looking ahead, as consumers are becoming apprehensive about job prospects, sentiment about their financial well-being will be impacted, and their spending intentions could further worsen. This, in turn, may cause consumers to further weigh, or even postpone, discretionary spending, and purchase of durables,” Nielsen points out.
In other words, economic discontent across Europe becomes a self-fulfilling prophecy. As Europeans worry more, they spend less, and that hits economic well-being. Being part of the Eurozone is, in no way, altering this dynamic.
So it is also difficult to see how the euro has brought increased purchasing power to consumers. Prices may not have risen much in statistical terms, but the European consumer perceives the cost of living rising, his/her wages not increasing rapidly, and an economy that is unstable and subject to wild changes.