The Cost of Euro Zone Membership

For the macro section of my book, I am looking at alternative explanations--beyond an on-going oil shock--to explain "secular stagnation" in the advanced countries.  In this case, we look at the effect of Euro Zone membership on the weak southern tier European economies, notably, Greece, Italy, Cyprus, Spain, and Portugal, as well as Slovenia and Ireland.  All of these use the Euro for their currency.

As it happens, we can compare these countries to four European Union members who were not part of the Euro Zone and use their own currencies.  These are Hungary, Poland, Romania and Bulgaria.  With the partial exception of Poland, none of these countries is particularly well governed.  As a group, they are broadly at the level of say, Greece or Portugal.

Cumulative Change in GDP versus Change in the Unemployment Rate (Simple Difference)

2007 to 2013

Source: IMF

The contrast between the weak Euro Zone members and EU members with their own currencies is stark, both in terms of GDP growth and employment.  The non-Euro countries, with the exception of Hungary, all saw net GDP growth from 2007 to 2013.  Whatever damage the recession had brought, these economies were larger in 2013 than they had been before the recession.  Only Hungary among the non-Euro members was poorer over the six year stretch, but even Hungary out-performed every single weak member of the Euro Zone. 

Similarly, unemployment rates were only marginally higher in Poland and Romania than before the recession.  By contrast, with the exception of Slovenia, every weak Euro Zone member had greater, in fact, vastly greater increases in unemployment rates in the six years to 2013.  For example, in non-Euro member Bulgaria, unemployment increased from 7% to 13% over the period.  In Hungary, the unemployment rate swelled from 7% to 10%.  But in Euro member Spain, the unemployment rate exploded from 8% to 23%, and in Greece, from 8% to 27%.  Indeed, the average unemployment rate for the Euro Zone group exceeded 17% in 2013, compared to 10% for the non-Zone countries.   This exactly reversed the situation of 2007, when the Euro Zone countries could boast an unemployment rate 1.3 percentage points lower than the above-listed non-Zone members.

Euro Zone membership, as it turns out, proved unimaginably costly for the weak Euro Zone members.  What did it cost Greece, for example?  About 20 percentage points of GDP and 15 percentage points of unemployment.  A truly horrific price.