Integration of the Euro-zone could be a dream

Since the introduction of the single currency in Europe five years ago, economists have tried to trace the unfortunate fact that the economy is called the "Euro-zone."

Yet, over the past few months, it became quite clear that the euro zone is not the economy. Instead, Europe seems to be attached to the fact that it was before the Euro was introduced - 12 national economies are going their own way to an even greater extent than before.

Slowly, the markets are beginning to realize that integration does not occur. This has two important implications. This will make management of the economy of the euro area is more and more difficult. And this will lead to large fluctuations in asset prices in different European countries - smart investors will want to be sure that they are on the right side of the price bubble.

To confirm this, let's look at how the European economy is growing this year.

In the second quarter, the euro area grew by 2% year on year. This figure shows only how meaningless averages. This creates an impression of moderate, sustained expansion. The truth also is that some European countries are growing more rapidly, and some are still stuck in recession.

Differences of growth
Gross national product of Ireland grew by more than 6% in the first quarter compared with a year earlier, while Spain has added 2.8%. Economy of Greece increased by 3.9% in the second quarter, while France grew by 3%.

Looking at these numbers, you might think that Europe has made a moderately good growth, provided that it has a mature, developed economy and aging population.

Let's look at other countries. The Austrian economy expanded by 0.7% in the first quarter. The growth of Portugal was only 0.1% over the same period. The Dutch economy grew by 1.1% in the second quarter compared with a year earlier as well as the Italian and the German gross domestic product growth was 1.5%.

We do not see so many signs of integration.
The picture does not change much, if you look at the various components of the economy.

As consumer prices are rising rapidly in Europe?
In Spain, they rose in August at 3.3% compared with a year earlier. In Greece, they were in July rose by 2.9%. Yet in Germany, prices in August rose only 2%. And in the Netherlands, they are limited in July, rising only to 1.2%, which is close to one third of the Spanish growth.

The discrepancy in employment
What about unemployment?
Harmonized European Union figures show that in Ireland, only 4.5% of the workforce were unemployed in June. In Austria, only 4.2%. In Germany, the unemployment rate was 9.8% and 9.5% in France.

Here, too, not many signs of integration. In truth, talk of the Euro-zone growth, employment and inflation has become a political fiction. They do not exist. Still, the integration between the economies of Europe was one of the key promises in the introduction of the euro.

Even the European Union, usually sansculotte defender Euro, recognizes what is happening is something unexpected. "The first years of the Commission of European Union saw the permanent differences in growth between participating Member States" - says the latest quarterly report on the euro area, published by the European Commission. "Excessive cyclical divergence can damage the smooth functioning of economic and monetary union and, in particular, to complicate the conduct of monetary policy."

Integration is wrong
Really. Other economists have noticed that something wrong. "The development of economic activity continues to vary among the countries of the Euro-zone, in both the short and long periods," said chief European economist in the "Deutsche Bank AG" in London, Thomas Meyer, in his report published in August.

According to Meyer, there is little that the convergence does not occur, the major European economies, in some respects tend to go alone.

Why so? One factor may be directly Euro. Each country had to follow different policies to meet the criteria for membership of the euro. Not surprisingly, this has generated a variety of economic outcomes.

Another reason is that the impact of the single currency may have been exaggerated. The euro area has the same money, the same interest rate, and more and more united capital markets. Yet every nation has different labor markets, tax systems and the demographic situation. Factors like these may be more important in determining the real rate of growth than the approach used by bankers.

The rates of the ECB
If convergence is not happening - and all signs say no - then there are two possible consequences.

First, the European Central Bank interest rates will have only limited effect. How can you set the same rates for France and Italy, where French Italian growth exceeds nearly three times? In the past, you could argue that the differences were small and becoming smaller. More you can not say that.

Then, the money will inevitably move from countries with low growth in countries with high growth. With the elimination of currency risks, investors will switch to a fast-growing member countries. This will lead to a bubble in asset prices in the high growth and a sharp decline in the low growth.

Integration was a key requirement for the introduction of the Euro. This is an essential part of a successful single currency. Without some evidence of real integration, soon, even ardent supporters of the Euro will probably have to ask whether it really is.

Forex Magazine
based on www.bloomberg.com