Eurozone Watch

One of the hottest topics in the debate on Eurozone economics over the past months has been the question whether dangerous divergences are building between the 12 countries which share the euro. In fact, the fear that some countries might have lost competitiveness to a dangerous degree has been behind scenarios of countries leaving EMU (there has been a lively debate in the blogosphere and on Eurozone Watch – see here and here and here).

For a conference in Berlin , Ulrich Fritsche (from the Hamburg University) and the German Insitute for Economic Research) and I have tried to evaluate how bad divergences really are.

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Ségolène Royal, who is currently seen as the most likely Socialist candidate for the French Presidential election next spring, today held her first speech on the future of the EU. Some of her proposals caught the interest of Eurozone Watch. 

On economic policy coordination, Ms Royal starts from one observation: Europe needs to find its way back to political choices in economic policy-making. So far so good. The current institutional mechanisms in the EU and EMU indeed have undisputedly reduced the scope of action for national governments. Meanwhile, no mechanisms have been put in place on the EU level to replace this loss of competency.  But what Ségolène Royal suggests as a cure to this obvious deficiency is far from convincing.

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While the conservatives and liberals in the Eurozone seem to continue to neglect issues of macro-economic management of the currency area (Daniela had an excellent post on this problem – let us know if we have missed something), the centre-left is busy discussing its own view in a number of conferences and working papers.

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It is clear to most observers that the international financial institutions need reforms. As a result of changes in the world economy – most notably the rise of emerging markets such as India and China – the composition of votes and quotas of the International Monetary Fund (IMF) no longer reflects economic realities. At the annual meetings of the IMF and the World Bank an important step in the right direction was agreed on. Four heavily underrepresented countries, China, Turkey, Mexico and Korea, will see an increase in their quotas and negotiations started on a revision of the formula which determines who has a say in Washington.

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