In their recent article published in the Journal of Economic Studies, Martin Dittus and Michael Haliassos demonstrate why a closer ECB coordination with national fiscal policies is urgently required. Much more economic collaboration is needed to address the economic divides in the Eurozone. This study highlights profound disparities in economic opportunity and security. It is particularly timely given crises such as the 2008 financial crisis and the COVID-19 pandemic. This growing divide threatens the long-term economic vitality of the entire region.
The study categorizes Eurozone countries into two distinct groups: the “core group,” which includes Germany, France, Italy, and the Netherlands, and the “peripheral group,” consisting of Spain, Portugal, and Greece. These results reveal how differently these groups are impacted by changes in monetary and fiscal policy. This disparity has a major impact on their economic livelihood.
Economic Disparities in the Eurozone
The Eurozone has experienced significant difficulties in attaining consistent economic growth across member states, especially during times of economic turmoil. Our research finds that core states such as Germany and France continue to do well because they have a much stronger interest rate to GDP growth relationship. By contrast, peripheral countries like Spain, Portugal and Greece need to turn to fiscal policy more than ever to stimulate their economies.
Interestingly, in the case of most Eurozone countries—excluding Ireland, Greece and Luxembourg—there has been a demonstrative positive effect of euro-area fiscal policy on growth. This large disparity underscores the importance of targeted fiscal and monetary policies. What worked in one economic environment of the Eurozone would not work for any other. The findings highlight that better coordination between national fiscal policies and the ECB’s monetary strategies are key. Without them, we risk further economic divergence.
The Role of Monetary Policy
The core group’s economic model paints an inverse picture, one where monetary policy actually helps grow GDP. By contrast, the monetary policy in peripheral countries does not offer an equal level of support for economic growth. This divergence further complicates achieving a balanced economic recovery throughout the Eurozone. The current crises have exacerbated these inequities, further muddling the landscape.
When decisive action was needed during the COVID-19 pandemic, countries within our peripheral group acted swiftly and strongly. Most importantly, they rolled out remarkable fiscal stimulus to fight the recession. The reliance on fiscal policy in these nations highlights the limitations of monetary policy’s effectiveness when addressing the needs of diverse economies within a unified currency area.
Call for Structural Reforms
The results highlight that without much deeper structural reforms, economic divergence will continue to be a most prominent challenge for the Eurozone. The research advocates for enhanced coordination between the ECB and national fiscal policies to foster a more stable economic environment. It makes the case that deep and meaningful collaboration is necessary to close the divide that exists between core and peripheral states.
According to the study’s authors, these are distinctions that policymakers need to understand and tailor their approaches to. Instead, they’re calling for a re-evaluation of monetary policies that prioritize inflation. By more closely marrying these policies to national fiscal policies, the authors argue the Eurozone would be likely to experience superior economic performances.