We are already witnessing a break-up of monetary union along national lines.
Quite a statement – particularly given it comes from the chief economist of the Organization for Economic Co-operation and Development. For that is precisely how Pier Carlo Padoan described what you can see going on in Europe’s financial system at the moment.
His comments, in the press conference following the announcement of the OECD’s latest forecasts today, revolve around a couple of graphs from his presentation. First is the outflow of money from various countries’ banking systems.
From this chart above you can see that Greece and Spain are seeing an enormous exodus of capital from their banking systems as depositors desperately try to move their money somewhere safer.
And above is the average interest rate faced by businesses in various Eurozone countries. As you can see, there is an enormous disparity between the various different countries. In a functioning economic area you simply wouldn’t expect to see quite so much divergence between members of the same currency. In Britain a company from one region can, theoretically at least, borrow at the same kinds of rates as one from another region.
Above is the shortfall of capital in various countries’ banking systems.
Finally, above are the differences between the historical level of various euro countries’ borrowing costs and where they are at the moment. As you can see, for those periphery nations they are far higher than they usually are.
Now, taken alone, none of this is particularly radical. But Padoan’s point is that taken together these are signals that what one would normally expect from monetary union – convergence of different countries’ financial systems, borrowing rates and so on, simply isn’t happening – hence his point about “a break up of monetary union along national lines”.
He continued: “countries are being increasingly left alone to deal with their banking problems, their sovereign problems, their adjustment problems, while being a part of monetary union. This is a contradiction that needs to be addressed.”
The one positive story is that at least some of those pre-existing disparities between the uncompetitive and competitive countries (eg Greece vs Germany) as measured by unit labour costs is narrowing a touch. But as you can see from the graph below, there’s still a long way to go.
This is a slightly geekier version of an article originally written for the Sky News website.