The convergence trends of the single currency's first years have proven partly illusory. Before the crisis, the euro area was the symbol of continuously increasing prosperity. Real income per inhabitant in the euro area rose steadily between 1999 and 2007. This was partly fuelled by favourable credit conditions and by large capital flows moving towards the Member States with increasing current account deficits. However, these flows did not always translate into sustainable investment. In some cases they rather fuelled "bubbles", such as in the real estate and construction sectors, as well as an increase in government spending. The positive developments of the early 2000s also partly hid underlying vulnerabilities in these countries. They were notably related to the financial sector and to a loss of competitiveness. This was in several cases compounded by inefficiencies in labour and product markets. These weaknesses were not fully picked up at the time, either by financial markets or by public authorities. The EMU lacked a developed surveillance framework to track or correct these imbalances.
The Commission's analysis in the "Reflection Paper on the Deepening of the Economic and Monetary Union" of 2017 is clear and good if the word "partly" is omitted in the first line. Convergence has proven illusory. So where should we go from here?
Reference for the used photo:
Cover photo: European Commission / Gianni Borsa
The EU Commissioners Pierre Moscovici and Valdis Dombrovskis. (f.l.t.r.)