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By Dr. J. Leontiades
Cyprus International Institute of Management
The Euro common currency did what it was supposed to do. It removed currency barriers, thus encouraging trade and capital flows between member countries. What was not fully appreciated at the outset was the strain this would place on the less efficient member countries.
Having abandoned their own currencies, members of the Eurozone were left without protection against excessive imports and capital outflows provided by a national currency. Before joining the common currency, they could vary their exchange rates to deter imports and encourage exports. Without such protection, the economically weaker countries (mainly the southern Mediterranean countries) soon developed major trade deficits. Capital outflows followed.
A North-South Divide?
The predominance of southern Mediterranean countries requiring financial assistance raises the question of an economic North-South divide. Is there evidence of such a divergence? This requires a comparison of the economic performance of the five southern countries relative to the EU.
Using EU data we can compare the economic performance of five southern Mediterranean countries (
In 2005, most of the five southern Mediterranean countries had a per capita GDP which was at or near the EU average. The
Eleven years later, the performance of the five southern countries had deteriorated compared to the EU average. The North-South gap had widened. Not surprisingly,
Despite Eurogroup Advice and Assistance
This deterioration of the five southern countries compared to the total EU is despite much Eurogroup advice, financial assistance and Troika-led reforms. Cypriots will be familiar with most of these. They include privatisation, reducing public sector spending, improving the civil service, tax reforms, banking regulations and others, mostly of a financial nature. Although many would agree that many of these reform measures were admirable and desirable – it seems they did not close the North-South gap.
As many Cypriots will be aware, this may be partly because some of the Troika reforms were not implemented. Even so, it was naive of the Eurogroup to believe that its reforms were sufficient. Economic performance is much more complex. Other factors are also involved. These include work ethic, corruption, education, traditions, teamwork, time-keeping, political attitudes, social distinctions and other factors which taken together are often grouped under the heading of “culture”.
To the degree that these cultural factors are relevant, we should not be too optimistic about any short-term reduction of the North-South economic gap. Cultural change is by its nature a long term proposition, typically requiring decades if it is to happen at all.
