The Cost of the Super Euro: 2002–2014

Abstract

Until 2002, the euro was below parity with the dollar, then it jumped as a consequence of a mistaken decision adopted by the European Central Bank (ECB) at that time. What we do in this chapter is simply say “If, from 2003 to 2014, the euro would have been driven more or less to around parity, what would have happened in the Eurozone in terms of rate of growth, real gross domestic product (GDP), employment, unemployment and public finance?”

Our results show that the cost of the super euro for the Eurozone has been almost 10% of GDP, i.e. at the end of 2014, Eurozone GDP would have been higher than the historical data by almost one trillion euro. The most negatively affected countries are Finland (−22%) and Greece (−18%), followed by Portugal (−15%) and the Netherlands (−13%). Italy, Austria and Belgium lost about 10%. However, Germany and France also lost 9.5% and 8.6% of GDP respectively. With −5.1%, Spain was somehow able to limit its losses.

In terms of total employment, the Eurozone lost over 10 million jobs and gave the rest of the world, mainly the United States and China, higher employment.

Specifically, Germany lost 3.1 million jobs, France a little less than 1.4 million, Italy 1.8 million, Spain 800,000 and Greece over 400,000 (which, in relative terms, is a huge amount of employment for Greece).

Let’s look at the other side of the coin, i.e. public finance.

Due to that masochist monetary policy leading to a super-evaluation of the euro, public finance deteriorated, both in terms of deficit and debt. In the euro area, we had a huge deficit of over 268 billion euro by the end of 2014. Instead, we would have had a surplus of 242 billion euro which is a difference of about 510 billion euro.

On the side of government debt, for the euro area, we would have had over 3 trillion euro of reduced debt, spread over the countries: 860 billion euro less in Germany, a little more than 440 in France and 512 in Italy, a little less than 400 billione euro for Spain and 131 for Greece.

These results simply mean that, in the case of parity, we would not have had any European crisis or any sovereign debt crisis, perhaps even with respect to Greece.

Finally, there would have been no effect on inflation. Instead, the inflation rate would have been well below the 2% target originally assigned to the ECB and, in addition, the risk of deflation would have been avoided.

This is part of what we called a “negative-sum game” and that negative sum, at least in terms of GDP and employment, was indeed shared proportionally among the different Eurozone members.