20150624-NATIXIS-Is_it_possible_to_have_countries_with_very_different_per_capita_incomes_in_a_monetary_union__11页_863kb

Summary of FLASH ECONOMICS: "Is it possible to have countries with very different per capita incomes in a monetary union?"

Core Content

This document explores the feasibility of maintaining a stable monetary union among countries with significantly different per capita incomes, using the euro zone as a case study. It emphasizes the challenges and conditions necessary for such a union to function effectively.

Main Question

Can a monetary union include countries with very different per capita incomes and still remain stable?

Key Findings

• The euro zone is a monetary union with substantial income disparities, especially between Germany and countries like Portugal, Greece, Slovenia, Latvia, Lithuania, and Slovakia.
• A monetary union can be stable if:
  • Nominal wage differentials match productivity differentials.
  • Real wages grow in line with productivity and not faster.
  • There are mechanisms for income and investment transfers from richer to poorer countries, akin to federalism.

Conditions for Stability

1. No Competitiveness Bias: Unit labour costs must be similar across countries.

   • This requires that relative nominal wages equal relative productivity.
   • If real wages grow faster than productivity, it leads to a loss of competitiveness and potential balance of payments crises.

2. Federalism-Related Transfers: Income and investment transfers are needed to reduce purchasing power gaps.

   • The larger the income disparities, the greater the required transfers.
   • However, such transfers may be politically difficult to implement, especially in richer countries.

Analysis of Euro Zone Trends

• From 1999 to 2008, nominal wages in France, Italy, Spain, Portugal, and Greece increased faster than productivity, leading to higher unit labour costs.
• This resulted in:
  • Export market share losses in these countries.
  • Deterioration in current account balances.
• Real wages in these countries grew faster than productivity, further exacerbating competitiveness issues.

Federalism and Transfer Mechanisms

• The EU has implemented various transfer mechanisms, including:
  • Structural funds (Table 1 and 2).
  • EU budget transfers.
  • European Investment Bank (EIB) financing.
• However, these transfers are relatively small compared to the income differentials, indicating limited federalism in practice.

Conclusion

• A monetary union with countries of very different per capita incomes is possible, but only under strict conditions.
• These conditions are:
  • Alignment of nominal wages with productivity.
  • Synchronization of real wage growth with productivity.
  • Acceptance of federalism-related transfers by richer countries.
• The euro zone has not met these conditions, leading to instability and crises, particularly in lower-income countries.
• The catch-up in productivity is slow or nonexistent, making it difficult for poorer countries to converge in living standards quickly.

Chart Highlights

• Chart 1A, B, C: Show income and productivity dispersion among euro zone countries.
• Chart 2A, B: Display nominal wages and productivity levels in selected countries.
• Chart 3A–F: Illustrate wage and productivity trends relative to Germany.
• Chart 4, 5: Highlight market share losses and trade deterioration.
• Chart 6, 7A–F: Show unit labour costs and real wage-productivity relationships.
• Chart 8, 9: Depict per capita GDP ratios and productivity catch-up progress.

Disclaimer

• The document is strictly confidential and intended only for professionals and qualified investors.
• It is not a financial analysis and does not comply with legal requirements for investment research independence.
• It does not constitute a personalized investment recommendation.
• No liability is accepted by Natixis or its affiliates for any use or reliance on the information contained in the document.
• The information is based on public data and may be subject to change.
• The document is not an offer or solicitation for any transaction.
• It is not a complete analysis of all relevant facts and may include assumptions and forecasts that are subject to change.