Europe and the Euro

NBER Reporter, Winter, 2008

An NBER conference on "Europe and the Euro" took place on October 17 and 18 at Bocconi University in Milan. The conference highlighted the success of the first ten years of the Euro in terms of product market reforms, increased trade between members, successful monetary policy by the European Central Bank (ECB)--both in normal times and in the most recent turbulent months, progress towards more financial liberalization, and integration. However, the conference also noted the need for further progress in terms of labor market reforms, banking supervision and regulation on the European level, integration of financial markets, and synchronization of business cycles.

Organizers Alberto F. Alesina, NBER and Harvard University, and Francesco Giavazzi, NBER and Bocconni University, chose these papers to discuss:

Silvia Ardagna, Harvard University; Alberto F. Alesina; and Vincenzo Galasso, Universita Bocconi "The Euro and Structural Reforms"

Discussant: Otmar Issing, European Central Bank

Barry Eichengreen, University of California, Berkeley and NBER, "Is the Euro Forever?"

Discussant: Martin Feldstein, Harvard University and NBER

Antonio Fatas and Ilian Mihov, INSEAD, "The Euro and Fiscal Policy"

Discussant: Roberto Perotti, Universita Bocconi

Jeffrey A. Frankel, Harvard University and NBER, "The Estimated Effects of the Euro on Trade Why Are They Below Historical Evidence on Effects of Monetary Unions among Smaller Countries?"

Discussant: Silvana Tenreyo, London School of Economics

Ulf Soderstrom, Universita Bocconni, "Re-Evaluating Swedish Membership in the EMU: Evidence from an Estimated Model" and Ricardo DiCecio and Edward Nelson, Federal Reserve Bank of St. Louis, "Britain and the Euro: Re-considering the Pros and Cons"

Discussant: Carlo Favero, Universita Bocconi

Matteo Bugamelli and Roberta Zizza, Bank of Italy; and Fabiano Schivardi, Universita di Cagliari, "The Euro and Firm Restructuring"

Discussant: Gianmarco Ottaviano, Universita di Bologna

Anil K Kashyap, University of Chicago and NBER, and Reint Gropp, European Business School, "A Gropp, European Business School, "A New Metric for Banking Integration in Europe"

Discussant: Loretta Mester, Federal Reserve Bank of Philadelphia

Alberto Giovannini, Unifortune Asset Management, Milan, "The Integration of European Financial Markets: Why Has It Not Happened Yet?"

Discussant: Richard Portes, London Business School

Lucrezia Reichlin, European Central Bank, and Domenico Giannone, Universite Libre de Bruxelles, "Business Cycles in the Euro Area"

Discussant: Olivier J. Blanchard, MIT, NBER, and the International Monetary Fund

Steven G. Cecchetti, Bank for International Settlements and NBER, and Kermit L, Schoenholtz, Citigroup, "ECB Policy: The First Decade and Beyond"

Discussant: Pervenche Beres, European Parliament

Alesina and his co-authors investigate whether the adoption of the Euro has facilitated structural reforms, which they define as deregulation in the product markets and both liberalization and deregulation in the labor markets. After reviewing theoretical arguments linking the adoption of the Euro to structural reforms and investigating the empirical evidence, they find that the adoption of the Euro has been associated with an acceleration of the pace of structural reforms in the product market. In contrast, they find no connection between the adoption of the Euro and labor market reforms, at least as measured by changes in the legislation of primary labor markets. Their paper also discusses issues concerning the sequencing of labor market versus product market reforms.

In his paper, Eichengreen concludes that it is unlikely that one or more members of the Euro area will leave in the next ten years and that the total disintegration of the Euro area is even more unlikely. The technical difficulties of reintroducing a national currency should not be minimized. Nor is it obvious that the economic problems of the participating member states can be significantly ameliorated by abandoning the Euro, although that possibility cannot be dismissed either.

The creation of a single currency in Europe was accompanied by significant changes in the institutional setting for fiscal policy. Fatas and Milhov ask whether these institutional changes have led to a change in the conduct of fiscal policy by the members of the Euro area. The authors review the behavior of fiscal policy after the introduction of the Euro in several dimensions: procyclicality, volatility, coordination, and the role of automatic stabilizers. They characterize how the common currency and the constraints associated with the Stability and Growth Pact have shaped fiscal policy among the members of the union. In order to provide a more complete picture of fiscal policy, they also report results related to the behavior of fiscal policy at the national level. Their results show that despite the significant change in the institutional setting, the behavior of fiscal policy in the Euro area is mildly procyclical and has not changed much since the introduction of the new currency. In contrast, U.S. fiscal policy has become distinctly countercyclical. Also, there has been a broad-based decline in the volatility of discretionary fiscal policy in all of the major economies. Furthermore, the discrepancy of fiscal policy across Euro-area countries--measured by the dispersion of cyclically adjusted balances-has decreased threefold since 1999.