For at least 50 years, there has been no synchronisation of the business cycles of countries that are now members of the Eurozone. What''s more, national business cycles of Eurozone countries are now even less synchronised than they were before the establishment of the single currency. These are the central findings of new research by Brigitte Granville and Sana Hussain to be presented at the Royal Economic Society''s 2015 annual conference.
Much criticism of Europe''s monetary union focuses on the problem of applying a ''one-size-fits-all'' monetary policy to the diverse group of sovereign countries that use the single currency. The chronic stagnation and high unemployment now seen in many Eurozone countries is a clear indication of the risk that at any given time monetary policies formulated on the basis of the whole union''s aggregate economic and financial conditions may not be suitable for many of the individual countries participating in the union.
For these policies to work, the business cycles of the Eurozone countries would need to be closely synchronised. But this research, based on OECD industrial production and equity market data in a broad sample of 10 Eurozone countries, shows not only that this necessary synchronisation of the expansionary and contractionary phases of the business cycle has not existed in these countries throughout the past half century, but also that these cycles became even less synchronised in the decade after the launch of the single currency.
Comparing the periods before and after the Eurozone came into existence, Greece, Ireland and Portugal exhibited the greatest decrease in average concordance levels: 35%, 22% and 19% respectively.
This central finding of the research suggests not only that an important condition for the success of the European monetary union was lacking but also that once launched, the Eurozone further weakened this condition for its own viability.
The authors arrive at this main conclusion by establishing a broad perspective on the relations between different types and characteristics of business cycles both within and between the sample of countries: Austria, Belgium, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal and Spain.
They distinguish first between business and financial cycles, and then draw a further distinction between the ''classical'' version of each of those cycles, which has to do with overall expansion and contraction in the levels of economic or financial activity, and the ''growth'' version, which measures upward and downward deviations of economic or financial activity from its long-term trend.
The authors further refine their analysis by breaking down the full sample period into sub-periods based on dates where the mean and standard deviation of these series appear to go through major points of change. They then calculate concordance indices for each of the sub-periods to observe how synchronisation has evolved over time.
The central conclusion on the increasingly weak synchronisation of business cycles refers to the ''classical'' cycle of underlying trends. The research also shows a high degree of ''growth'' synchronisation – that is, of the timing and extent of upturns and downturns in the growth of industrial output and, especially, of financial asset prices where the degree of concordance reaches its highest level and statistical significance.
But this relatively high synchronisation of upward and downward movements in output and financial markets is not the same as the actual levels of output moving in lockstep. And it is precisely such fundamental macroeconomic convergence reflected in synchronised classical business cycles that must underpin integration projects like the single European currency. In short, recessions and recoveries are not synchronised in the Eurozone implying that a one-size-fits-all monetary policy approach is suboptimal.
Eurozone cycles: an analysis of phase synchronization – BRIGITTE GRANVILLE AND SANA HUSSAIN