In a fixed exchange rate system such as the euro symmetry in the application of the standard is key for the well running of the currency and even its preservation over the long term: i.e. surplus countries should overspend and run deficits (either private or public or a combination of both) so they suffer from an excess of money in the economy and thus ultimately higher inflation. And just the opposite in case of deficit countries within the euro standard, as they need to cut down their spending in order to cut costs and prices and ultimately regain competitiveness. This was for long considered, if only implicitly, as the main ‘rule of the game’ in the running of the classical gold standard at the time.
Of course we have heard about the application of adjustment policies in deficit countries in the eurozone during the recent crisis, the so-called ‘austerity policies’; or in the technical jargon, policies aimed at achieving ‘internal devaluation’ as an external devaluation is not possible at all. However, it is important to remember that it is the running of both policies in surplus and deficit countries what would lead to a balanced macroeconomic equilibrium over time in the eurozone. Just looking into the 2018 balances of each country (to be precise, each national central bank) in the Target2 payments settlement system in the Eurozone, we can see how far we are from symmetry in the area. Actually, the balances have been deteriorating quite dramatically since the summer of 2007; and now we have countries like Germany holding a significant creditor position against the rest of the Eurozone countries (and particularly against Italy and Spain) of nearly 30% of the German GDP.
Source: Institute of International Monetary Research, Monthly Update (2018). From ECB data.
The gold standard is often taken as a predecessor of the euro standard; true, both systems are based on the commitment to fixed exchange rates but the euro standard is much more stringent and demanding in that it is a ‘monetary union‘ (and not simply a ‘currency union‘ as the gold standard was, where national currencies ran at the announced fixed exchange rate and were ultimately governed by the national central banks). In an monetary union such as the euro standard the need to abide by symmetry, by both surplus and deficit member states, is even more difficult to articulate and achieve: the states do not longer have their national central banks to inject or withdraw money as needed be, and symmetry can mainly be achieved by expanding or tightening fiscal policy (and also by supply-side policies, that are indeed needed but take a longer time to be effective).
Along with two colleagues of mine, Alessandro Roselli (Cass Business School) and Simeng He (University of Buckingham) we have conducted a research on the measurement of asymmetry in the running of the gold standard from the 1870s to 1913. As shown in the table below, only the hegemonic economy, the UK, abided by symmetry, whilst the other 4 major European economies at the time did not (see table below).
See the following link for further details on our paper: https://www.researchgate.net/publication/328562649_A_measurement_of_asymmetry_in_the_running_of_the_classical_gold_standard
This is an extract from the paper with a summary of our conclusions, with striking parallels on the situation of the euro standard and the asymmetries mentioned above:
‘The consequences resulting from the running of the gold standard with a deficient degree of symmetry should not be underestimated, as countries like Germany and France refused to let the increase in reserves to be reflected in a greater amount of money supply. This created tension in the system, as countries like Italy or Spain would find it more difficult to regain competitiveness, and thus a greater internal devaluation was needed to be able to compete with their trade (surplus) partners.
Were the asymmetries of the pre-WW1 period the origin of the gold standard’s final collapse? The straight answer is negative: all the five countries here surveyed had to suspend the standard at the outbreak of the war, if not before such as Spain in 1883; it was the War, with the huge expansion of the money supply, dramatic inflation and social unrest that made later in the 1930s the gold standard unable to survive. In the post-war period, Britain had lost her hegemonic status and symmetry together with it. (…) the asymmetry of the hegemonic country (the US) under the Bretton Woods System might well explain its collapse.
Should we infer from these experiences that symmetry of the hegemonic country is the precondition for a fixed rate system (or for a currency union with a single currency) to survive? And, referring to the Eurozone, should we think that Germany – unquestionably the hegemonic country – is behaving asymmetrically and that the Eurozone should collapse as a consequence? Another paper would be needed to answer these questions.‘
Some claim the Eurozone must be completed with a full fiscal (budget) union, so a meaningful ‘federal EU budget’ can transfer resources within the area when needed; however, even if politically feasible, this option will take time to take place and the imbalances within the Eurozone keep on accumulating day by day. There are pressing issues resulting from the lack of symmetry in the running of the euro standard no one can now deny: How are the Target2 balances going to be settled, if they will be at all at some point? Can persistent trade imbalances among member states run within Eurozone countries? Can more flexible goods and services as well as labour markets reduce asymmetries within the Eurozone enough? Can the Eurozone force surplus countries to be more expansionary when needed be?
The eurozone member states clearly opted for a more centralised monetary union during the crisis, and the questions above are some of the key questions still pending to address for the euro standard to stop accumulating internal asymmetries. The other option would have been to abide by the no bail-out clause stated in the Maastricht Treaty and the application of the subsidiarity principle in the construction of the eurozone, and thus let errant countries fail if they could not fulfil the strict requisites to remain in the eurozone; but this was clearly not the option taken.
Juan E. Castaneda
PS. For information, we will address these issues in a conference on ‘The Economics of Monetary Unions. Past Experiences and the Eurozone’ at the University of Buckingham (21-22 February 2019). Please check the speakers and the programme online should you want to attend (by invitation only).
the old lady of threadneedle street 