The Euro was meant to be a lubricant for inner-European trade. A Europe divided along currency lines, supporters of the project argued, was hopelessly inadequate to compete with the big players of the modern global economy. At the outset, the argument seemed plausible. Other things equal, a removal of exchange rate risks and other currency-related transaction costs should have the same trade-boosting effect as the removal of a tariff or, for that matter, a physical obstacle.
But other things are never equal. The Euro itself has changed many other economic fundamentals, in ways which hinder economic integration rather than facilitating it.
The single currency has supplied the Mediterranean economies with huge volumes of cheap credit. Since most of this influx has been channelled into short-lived consumption or construction booms rather than productive investment, the pre-existing productivity gap between Northern and Southern Europe has not narrowed. Meanwhile, the influx has led to pronounced wage and price appreciations in the Southern member states relative to Northern levels. This can be seen in the development of labour unit costs, i.e. labour costs adjusted for productivity changes, for the economies as a whole. Since 1995, unit labour costs in have increased by 3% in Germany and by 11% in Austria. During the same period, they have increased by 39% in Italy, by 41% in Spain, by 48% in Portugal and by 64% in Greece. Economies which start from sufficiently competitive positions can cope with such appreciations, but if they magnify already existing imbalances, the consequences are severely damaging.
As a result, the years between 2001 and 2007 witnessed a sharp polarisation in intra-European trade patterns. The trade surpluses of Germany, the Netherlands and Belgium grew larger every year, and so did the trade deficits of Greece, Portugal and Spain. In pre-Euro times, imbalances of this type would have been corrected automatically through exchange rate adjustments. In fact, the Mediterranean economies would not even have been able to borrow on the international capital markets at such low interest rates. The credit-fuelled booms and runaway budget deficits would have been held in check by natural constraints.
Where does this leave the prospects for European economic integration? While the consumption and import boom that the Mediterranean countries enjoyed up until 2007 was built on sand, so was the corresponding share of the Northern European export bo