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If the eurozone implements policies that reduce the member countries’ heterogeneity, increase solidarity between countries and boost the technological level and potential growth, the eurozone will become more credible. The problem is that when the euro zone becomes more credible – as is the case today – capital flows into the zone and the euro appreciates, Patrick Artus from Natixis reports.

Key quotes

“The euro zone’s credibility is improved when the implemented policies reduce the member countries’ heterogeneity when solidarity between these countries increases and when the technological level – and therefore potential growth – increases. These developments prevent a divergence of living standards between the countries and therefore the risk of a break-up of the euro and boost long-term growth.”

“In periods when the euro zone’s credibility is good or improving (2002-2008, the recent period), we see that capital flows into the zone and that the euro’s weight as a reserve currency increases. The fact that capital flows into the eurozone when the euro’s credibility is good or improving implies that the euro appreciates when the euro’s credibility is good or improving (2002-2008, in the recent period).”

“We see that when the euro is strong (2005-2008), the euro zone’s export market shares are maintained, whereas these market shares increase when the euro weakens, from 2010 onwards.”

 

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