I was invited to speak about euro adoption at the Club Grande Europe in Paris. The Club is a gathering of journalists who specialize in European economic and political issues, and Club discussions are devoted to the future of enlarged Europe.
Today’s meeting was held few weeks after Slovenia accession to the eurozone. Slovenian representative presented his country path to eurozone, with a special emphasis on the fact, that euro was very well known to Slovenians, they had euros in their wallets well before accession. This euro familiarity made the whole process easier. The price developments in Slovenia were similar to that of the first wave, in early 2002. Prices of some products and services that have very low share in CPI basket, but are bought on daily basis went up. Consequently, inflation will most likely not rise while the perceived inflation has already gone up. So the well known “cappuccino effect” seen in Italy is also experienced by Slovenia (this time around we should probably call it coffee, barbers and banking fees effect). I am very close to labeling this effect the “euro enlargement curse”, with repeated evidence that prices do not rise after euro adoption, but people think that they do rise. This “curse” will be a challenge for all countries joining the eurozone.
The debate at Club Grande Europe was very broad and it shows that many issues are unresolved or that today’s methods of dealing with these issues will be challenged in the future. I gave a speech on the costs and benefits of euro adoption, which was a slightly modified version of my speech at the American Chamber of Commerce. Czech National Bank governor Zdenek Tuma summarized recent developments and raised several issues, for example deepening versus enlargement or rules versus discretion, with Maastricht criteria as illustration. Mr Christian de Boissieu, chairman of the council of economic advisors to the French President raised a number of issues, with a particular focus on a possibility of giving more power to the Eurogroup, without reopening the debate of the European Constitution. It appears to me that this idea surfaces well in France, while Germany takes a different approach, putting its weight behind the EU constitution. Mr Boissieu also asked tough questions, what is the optimal timing of eurozone accession, what is the right conversion exchange rate and what will be the policy response if we face severe overvaluation of exchange rates on the way to euro. There are no easy answers to these questions.
One thing seems clear from the Club Grand Europe debate. If Europe wants to retain its key role in global economic governance it has to keep its own house in order. I am not able to predict what changes will take place, but we should definitely start with completing of the single market in products and services and moving fast forward with labor market reforms. Here you can think of far reaching implications of recent Great Migration (one million Poles finding jobs in UK, Ireland, Germany etc.), for example it forces certain labor market “reforms” and raises speed limit (the rate of potential output growth) in host countries. You can also think about automotive industry in Germany, France and Italy. Within next five to ten years China will be able to manufacture cars that will be as reliable as European cars, but will cost half or maybe even one third of the European price. What it means for automotive sector jobs in EU countries. High value added jobs will become even more precious (design, research and development) but what about the blue collar jobs in these sectors. Greater openness to intra-EU labor mobility would help to prepare for the upcoming shocks, and would help to cushion them.