As the Euro Turns 20, a Look Back at Who Fared the Best. And Worst.

Sources: Eurostat, European Commission (Standard Eurobarometer), IMF, OECD, WIOD, Bloomberg data

Editors: Daliah Merzaban, Craig Stirling

Assistance by: Maeva Cousin, Jamie Murray, Alex McIntyre, Jeremy C.F. Lin, Julius Domoney, Zoe Schneeweiss, Fergal O’Brien, Paul Gordon, Jana Randow, Boris Groendahl, Gordana Filipovic, Kati Pohjanpalo, Michael Winfrey, Joost Akkermans, Wout Vergauwen, Ben Sills, William Horobin, Joao Lima, Dara Doyle, Marcus Bensasson, Paul Tugwell

Methodology

To construct its tests, Bloomberg Economics examined two dimensions: 1) Did each country reap the benefits from greater stability and deeper integration, while remaining competitive in good times?; 2) Did these benefits subsist through the back-to-back financial and debt crises of the past decade, despite the less well-suited macroeconomic policy levers?

The approach drew inspiration from Canadian economist and Nobel laureate Robert Mundell’s 1961 Optimum Currency Area theory, which argued that countries sharing strong economic ties and similar business cycles should benefit more from sharing a currency than maintaining separate exchange rates.

The 10 indicators are described below, including a rationale for each from Bloomberg economist Maeva Cousin. (Click here to return to the story.)

Stability measures

1. Favorable financial conditions: Did government bond yields converge toward global risk-free rate (e.g. U.S.) after joining the euro?
   • Calculation: Difference between pre-euro 5-year average and post-euro 5-year average yields on 10-year government bonds, compared with respective change in similar average U.S. yields. Drop of ≥ 5 basis points more than U.S. was A, drop of ≥ 5bps less than U.S. was C, rest B.
   • Rationale: “With more credible institutions and using a large international currency as their own, most euro-area countries saw their risk premiums and financial conditions improve after joining the euro.”
2. Inflation anchoring: Did inflation anchoring around the ECB’s 2% target improve after joining the euro?
   • Calculation: Absolute difference between pre-euro 5-year average headline inflation and ECB target versus absolute difference between post-euro 5-year average headline inflation and ECB target. Converging ≥ 0.5 percentage point scored A, diverging ≥ 0.5pp scored C, rest B.
   • Rationale: “Prior to joining the euro, a number of countries suffered from lack of credibility and a history of devaluations that pushed up inflation. Adopting the ECB as their central bank helped anchor inflation and bring stability.”

Integration measures

3. Productivity growth: Has productivity risen substantially since joining the euro?
   • Calculation: Difference between pre-euro 4-year average and post-euro 4-year average real productivity per hour worked compared with euro-area average. Countries ≥ 20% higher than euro area are A, ≥ 20% below are C, rest B. (Note: Real productivity per worker used for Belgium.)
   • Rationale: “More stability and deeper economic integration helped support stronger productivity growth in some countries.”
4. Greater integration: Has participation in the euro-area value chain deepened since joining?
   • Calculation: Difference between economic integration with euro area’s first 12 joiners (EA12) in 2000 and 2014, measured as share in total domestic output of intermediary consumption from EA12 plus exports to EA12. Positive values are A, negative values C, rest B.
   • Rationale: “The single currency brought more certainty about exchange rates and the political commitment to long-term economic integration. Some countries seized this opportunity to develop deep and stable links with euro-area partners.”

Competitiveness measures

5. Pre-crisis competitiveness: Was the trade balance in surplus before the crisis?
   • Calculation: Trade balance (exports minus imports as share of GDP) in 2007. Surpluses scored A, deficits C.
   • Rationale: “Countries that saw improvements in their competitiveness during the stable period of the euro would normally have managed to maintain or acquire trade surpluses, while others were more likely to run a deficit in 2007.”
6. Post-crisis competitiveness: Did countries that needed it manage to rebalance their trade position during the crisis?
   • Calculation: Difference between trade balance (exports minus imports as a share of GDP) in 2008 and 2017, compared with euro-area average. Countries that ran deficit in 2008 and saw change ≥ 20% higher than euro area scored A, ≥ 20% below are C, rest (including nations that ran surpluses in 2008) are B.
   • Rationale: “The crisis brought to light the large trade deficits of some euro-area countries. Among countries who ran deficits prior to the crisis, some managed to reduce them since 2008.”
7. Pre-crisis labor costs: Did labor costs remain competitive relative to euro-area peers in years before the crisis?
   • Calculation: Annual average change in unit labor costs between adoption and 2007, versus euro-area average. Countries with values lower than euro area are A, values above are C, rest are B.
   • Rationale: “With a fixed exchange rate, countries' relative competitiveness depends on the ability to produce at a cheaper cost. Euro-area countries where unit labor costs grew faster were at risk of losing competitiveness, while others benefited.”
8. Post-crisis labor costs: Did countries that needed it regain labor competitiveness relative to other euro-area countries during the crisis?
   • Calculation: Annual average change in unit labor costs between 2008 and 2017, versus euro-area average. Countries with values lower than euro area are A, values above are C, rest (including nations that scored A on indicator 7) are B.
   • Calculation: “The crisis brought to light the competitiveness challenge of some euro-area countries. Among countries that had lost competitiveness during the stable years, some managed to address the challenge through reductions in unit labor costs since 2008.”

Crisis stabilization measures

9. Ability to borrow: Were countries able to borrow at acceptable rates to finance their deficits through the crisis?
   • Calculation: Difference between share of time pre-crisis (2003-07) and share of time during crisis (2008-12) that 10-year government bond yields were >5%. Countries with increase of ≥ 10pp are C, rest are A.
   • Rationale: “Government bond yields diverged sharply through the sovereign debt crisis as investors started worrying about the risk of default or of denomination, in the case of an exit from the euro. This prevented some countries from implementing deficit-financed fiscal loosening.”
10. Fiscal policy option: Were countries hit hardest in the euro-area crisis able to use fiscal policy to support their economies?
    • Calculation: Change in government expenditures during debt crisis (2010 to 2012) for countries whose unemployment rate rose disproportionately during broader crisis (2007 to 2012), compared with euro-area average. Countries whose unemployment shock was > euro area and whose government spending increased by ≥ 8% are A, where spending changed by less are C, rest B.
    • Rationale: “With monetary policy not always suited to domestic economic conditions, fiscal policy plays a key role in providing more stimulus when monetary policy is relatively too tight. Some of the worst-hit countries did not have the possibility to do so.”

For overall grade, total number of Cs was subtracted from the number of As and resulting scores were distributed according to the following rubric: