Institutional imbalances in the euro area
The source of European problems and remedies
Manthos Delis
Professor of Financial Economics and Banking
Montpellier Business School
EESC public hearing "Strengthening the international role of the euro"
Real effective exchange rate (EMU vs. USA)
EESC public hearing "Strengthening the international role of the euro"
Data source: IMF
Is the euro more volatile than other major currencies?
EESC public hearing "Strengthening the international role of the euro"
Economic imbalances
• Economic development
• Government debt
• Youth unemployment
EESC public hearing "Strengthening the international role of the euro"
Imbalances in purchasing power-2018
Source: Growth from Knowledge (GfK), available at: https://www.gfk.com/insights/news/map-of-the-month-purchasing-power-europe-2018/
EESC public hearing "Strengthening the international role of the euro"
Debt to GDP ratio -- 2017
Source: The World Factbook, Central Intelligence Agency (CIA) available at: https://i0.wp.com/factsmaps.com/wp-content/uploads/2018/02/debt-to-gdp-ratio-european-countries.png
EESC public hearing "Strengthening the international role of the euro"
Youth unemployment rates--2017
Source: MapStats. Available at: https://en.jodi.graphics/2018/01/31/3-7-million-young-persons-25-unemployed-eu28/
EESC public hearing "Strengthening the international role of the euro"
Institutional imbalances -- the mother of economic imbalances
1. Bureaucratic quality
2. Rule of law and function of independent authorities
3. Corruption and the shadow economy
EESC public hearing "Strengthening the international role of the euro"
Governance quality -- 2017
Source: European Commission. Available at: https://www.reddit.com/r/europe/comments/8ejawu/european_regional_quality_of_government_index_2017/
EESC public hearing "Strengthening the international role of the euro"
Perceptions on corruption -- 2015
Source: European Commission. Available at: https://geoawesomeness.com/top-30-maps-charts-explain-european-union/
EESC public hearing "Strengthening the international role of the euro"
Real effective exchange rate for different euro area countries
EESC public hearing "Strengthening the international role of the euro"
Data source: IMF
Economic theory and evidence (1)
• Institutions shape economics and the long-term prospects of countries (as well as their convergence) is conditional on good institutions (Acemoglu, 2014).
• Poor institutions work in the same fashion of the poverty trap.
• They hinder even the role of financial markets, which price the relevant country risk and impose higher financial costs on domestic firms (Delis et al., 2019).
EESC public hearing "Strengthening the international role of the euro"
Who benefits from institutional improvements?
Source: Beatrice Pierluigi, David Sondermann, 2018. Macroeconomic imbalances in the euro area: where do we stand? European Central bank, Occasional Paper Series No 211. Original source for Chart 27 is Masuch et al. (2017).
EESC public hearing "Strengthening the international role of the euro"
A new European map on four dimensions OR How to use the Euro to harmonize imbalances
1. A cashless European payments system:
All the monetary transactions will gradually become cashless to help reducing the shadow economy.
EESC public hearing "Strengthening the international role of the euro"
A new European map in four dimensions OR How to use the Euro to harmonize imbalances
Transform the European support programs (EU funding) to an Investment Bank. Sources are from:
a) Existing EU funding
b) A European tax to the very rich (annual income above 200,000 Euro)
c) Large inheritance tax
d) Green tax (30 euro per polluting ton)
EESC public hearing "Strengthening the international role of the euro"
A new European map in four dimensions OR How to use the Euro to harmonize imbalances
3. The Investment Bank will provide and monitor incentives-related funds directly, in order to: a) Improve bureaucratic quality via the use of IT
b) Improve the quality and speed of the rule of law, especially as regards investment projects
c) Provide incentives and guidelines to ease doing business
d) Improve university education via incentives schemes (directly funding academic articles, universities with low unemployment rates for their graduates, etc.)
EESC public hearing "Strengthening the international role of the euro"
References (unless noted on slides)
• Acemoglu, D. (2004), “Institutions as the fundamental cause of long-term growth”, NBER Working Paper, No 10481, National Bureau of Economic Research, Cambridge, MA.
• Delis, M.D., I. Hasan and S. Ongena (2019), “Democracy and credit”, Journal of Financial Economics, forthcoming.
• Masuch, K., E. Moshammer and B. Pierluigi (2017), “Institutions, public debt and growth in Europe”, Public Sector Economics, Vol. 41, No 2, pp. 159-205.
EESC public hearing "Strengthening the international role of the euro"
Institutional differences in the euro area
The source of European problems
Manthos Delis
Professor of Financial Economics and Banking
Montpellier Business School
EESC public hearing "Strengthening the international role of the euro"
