Bridging the North-South Divide in the Euro Area

Remarks to the Euro50 Group Meeting in Brussels

March 28, 2014

I will speak from the point of view of a citizen of the South who is looking at that has happened in the euro area and worries about its future.

The North-South divide, or debtors-credits divide, makes the euro area feel like it is 1997. Only Germany feels it qualifies for the Economic Monetary Union (EMU); the others must adjust before they can receive any benefit from monetary union.

This implies that some countries are stuck in a fixed exchange rate system with just the minimum benefit from monetary union. We know this doesn't work.

A monetary union needs an insurance mechanism. Insurance via bail-ins won’t work. A union of stability can’t be based on defaults. What is the rationale? Mostly short-term German domestic politics, which is the wrong way of designing the future of EMU.

This divide feels very similar to the debate on inequality—why is there an obsession with fiscal and monetary austerity? Because, at the margin, it benefits the wealthy. Why did Japan take so long to fight deflation? Because rural voters, overrepresented in the Diet, didn't mind and politicians just wanted to be reelected.

It is the same in EMU now. At the margin, all the policy choices benefit a German minority. I wonder how sustainable this is. Let me discuss three points (1) the neglect of the demand side, (2) the asymmetric focus on rules, and (3) the insistence in the wrong narratives. None of this is really new, but it continues to impede the adoption of the right policies