COMPETITIVENESS OF THE ECONOMY AND THE CRISIS OF THE EUROPEAN MONETARY UNION

Kriza u Evropskoj Monetarnoj uniju (EMU) otkrila je unutrašnje slabosti njenog funkcionisanja. Evolucija EMU nije bila praćena odgovarajućim strukturnim transformacijama. Pretpostavke optimalnog valutnog područja o njegovom endogenom karakteru nisu se u dovoljnoj meri potvrdile. Utvrđeno je da se konkurentnost privreda evrozone pogoršala u odnosu na relevantne konkurente u svetu. Uniformno delovanje jedinstvene valute doprinelo je i produbljivanju razlika u konkurentnosti članica. Na duži rok, postojeća recesija usporava razvoj EMU i otvara pitanje njenog opstanka. Pred članicama EMU je dug put strukturnih transformacija. Radi adekvatnijeg prilagođavanja krizi, visoko zavisne od evra srpske finansije moraju da izaberu odgovarajući režim deviznog kursa.


Summary
The crisis in the European Monetary Union revealed the internal weaknesses of its functioning. The evolution of the EMU was not accompanied by appropriate structural transformations. The prerequisite for optimal currency area on its endogenous character is not sufficiently confirmed. It was found that the competitiveness of the euro area economy worsened compared to the relevant competitors in the world. A uniform operation of the single currency has contributed to the deepening of the differences in competitiveness among members. In the longer term, the current recession has slowed the development of the EMU and raises the question of its survival. In front of the EMU's members is a long road of the structural adjustments. In order to adapt to the European crisis adequately, Serbian finance highly dependent on euro must choose an appropriate exchange rate regime.

Introduction
The basic question that we wish to answer in this work is whether the functioning of the European Monetary Union (EMU) has led to a more successful development of the real sector and to an enhanced competitiveness or not. In the answer to this question we have structured the objectives and the paper itself in the following manner. Firstly, to determine what are the prerequisites, primarily economic ones, to be followed by monetary integrations that are embodied in the theory of the optimum currency area, but also controversies related to the introduction of euro, with which this crisis is basically identified. Secondly, to analyze tendencies in the development of competitiveness of the euro-zone economies, both with respect to the adequate competitors in the world (USA, Japan), but even more so amongst the membercountries of the integration itself. Thirdly, to analyze possible solutions and resolution of crisis, and its implications with respect to Serbia.

Integration and the European Monetary Union
Integration, as a phenomenon, in the economic and it may be said also in the social life is having its prerequisites. In case two companies are merging in a single economic area and are forming a single managerial structure what appears as a prerequisite is to have a comparable level of their development. If this is not the case, and the companies, i.e. firms are on different economic levels then it may rather be a case of acquisition of one company in respect of the other, and not of a joint business venture.
The same prerequisite basically applies for integration between states. In the integration practice what can be identified and distinguished are the three integration formats according to the criteria of the development level of the integration member country: North -North, North -South, and South -South. The past practice has shown that the level of benefit and success declines from the first to the last format, but also that every one of them can have a positive influence on the development of the member countries, depending on concrete circumstances (Grbic, Antevski, Todic, 2013, 49).
In the present-day European Union, it is possible to identify practically all of the three formats. The EU founding member countries, but also EFTA countries, are having the character of the North -North format, the newly admitted member countries in the so-called broad expansion of the year 2004 and thereafter, and some of the countries in the southern part of the continent are giving the Union the character of the North -South integration, while the CEFTA countries are an example of the South -South format.
The above said may be interpreted also in the following way. Firstly, founding of the EU, i.e. creation of the North -North integration format was based on more realistic economic criteria, primarily on a comparable level of economic development and similarities in the economic structure which allows for the development of competitiveness, while the later day expansions were rather inspired by political reasons and connected with the North -South format. The competitive basis did not appear to give an impetus, but rather the economy of scale and the option of easier access to capital, while economic structures remained different leaving little space for development of competition on a common market. Regarding the last integration format South -South, embodied today in the countries of the Western Balkans, it was envisaged as a temporary one and it did act in such a fashion in the previous cases.
The EU expansion processes were taking place in an environment of successful development of the world market. Period from the mid-1980s and up to the outbreak of the crisis in 2008 is characteristics for macroeconomic balance and stable GDP growth rates in the EU. The expansions made did not cause any special problems, except for the first one, German unification. Adaptation of the new member countries in such a climate was facilitated. The initial analyses did not indicate that the southern pole of countries with the lower share of industry in the GDP was strengthening, and that it had in this way disturbed the balance of the North -South European integrations format. In such a stable macro-economic milieu what was strengthened was the idea of formation of a new monetary unit -euro, although the previous two attempts at fixing exchange rate in the form of pegging  (Grbić, 2005). Nameće se pitanje kako je evropska privreda funkcionisala u tom okruženju, odnosno u uslovima formiranja monetarne integracije koje je počelo 1999 godine.
Theoretical basis for the formation of euro and establishment of the European Monetary Union (EMU) is also to be found in our near past: in the work of Mundell (1961) who has, in a discussion on the pros and cons of the flexible exchange rate (Friedman, 1953, Meade, 1957 used the syntagm: optimal currency area (OCA). Hence it is an area which does not coincide with the state borders, and which, if there is high work force mobility, can fix the exchange rate within its borders, while beyond borders, therefore towards the outside world, would let the exchange rate remain flexible. If some exterior challenges are to appear, the so-called asymmetric demand shocks, as a substitute for currency devaluation what is foreseen is the prices and wages flexibility. Later on this theory was expanded to cover several fields. The most representative of all the new theories on the OCA is to be found in the endogenous character of the zone. Thus Frankel, Rose (1997) underline that the zone has the potential for creating independently its own development in the sphere of economy, while some of the authors, Issing (2001), are expanding endogenous on to the political integrations as well.
A large number of economists were sceptical towards euro. The warnings, before its introduction, or even at the time of its successful functioning, are focused on the fact that euro-zone does not have the character of an optimum currency area. Crises may impact one country, yet benefit another one, therefore they are asymmetric. Fiscal policy is within the competences of the member countries and there is no political will for it to integrate. For example, one study which is presenting, in the research of the OCA, a classic contribution to the analysis of competitiveness of the member countries (Eichgreen, Bayoumi, 1996, p. 6, 7) and whose results have later on been basically confirmed (Joao, Rui, 2011), while researching the following convergence criteria: impact of asymmetric shocks on product, work mobility and transaction value of the single currency, comes very precisely, per countries, to the identification of what was later on actually to happen, pointing out at the following: • Firstly, OCA does not represent an optimum currency area. • Secondly, according to the degree of convergence towards OCA there are three groups of countries to be distinguished: the first one, with Germany, Austria and the Benelux countries, is the group ready for the membership in the EMU; the second group, covering United Kingdom, Denmark, Finland, Norway and France, is the group showing a small degree of convergence, and the third group with Italy, Greece, Portugal and Spain is the group of countries gradually converging towards the membership in the EMU. • Thirdly, between the OCA criteria and criteria for economic integration there is a symbiosis, i.e. the thesis is confirmed that integration is successful in those countries that have a comparable level of economic development and potential for competitive game. Already this brief survey of the views on the possibility of functioning of the OCA shows complexity and uncertainty of the euro introduction venture. The venture was conducted nevertheless, although the institutional euro structure had not as yet been formed. Under the Maastricht Agreement, criteria were prescribed for the membership in the EMU, the so-called convergence criteria, as a requirement for the access to its membership. They are: inflation rate and interest rates convergence, budgetary limitations, and exchange rates stability. European Central Bank was established and its policy formulated. For purpose of fulfilling criteria of public finance stability, the Stability and Growth Pact 1997 was formed, which adopted fiscal rules and sanctions for those states who would fail to comply (Grbic, 2005). The question is raised here how European economy functioned in such an environment, i.e. in the conditions of formation of the monetary integration which started in the year 1999.

Competitiveness of the EU economy
For the research into competitive position in the EMU and the EU what is relevant are the differences in the labour unit cost and the differences in the inflation rates. These differences are measured with the implicit real EMU, ova politika ima posebnu težinu jer oblik "interne devalvacije" omogućava da članice samostalno prilagode svoje cene okolnostima tržišta u uslovima datog, fiksnog kursa.

Labour costs
Lowering of the labour unit costs (LUC) represents today the basic weapon of practically all the countries in the world in the fight to improve competitive position of their economies. Successful reduction of the labour force costs is enhancing free flow of goods and services on the world market on the one hand, and on the other hand is making the given country a more attractive destination for the foreign direct investments. Therefore this is becoming not only the policy of companies, but also the state policy in the process of globalisation. In the EMU, this policy has a special weight as the form of "internal devaluation" is allowing member countries to independently adjust their prices to the market conditions under the circumstances of the given fixed exchange rate.
The competitive position of the EMU and the tendencies within the member countries is best illustrated by the informative message contained in the following data: REER based on the labour unit cost (LUC) for the economy as a whole (Table 1 and Table 2).   Četvrto, u članicama koje su zahvaćene dužničkom krizom, pre svega, u Grčkoj i Španiji, pa i u Italiji, Portugaliji i Irskoj, JTR su rasli po stopoma sličnim kao i u starim članicama, Holandiji i Danskoj, a u celini posmatrano, konkurentska pozicija im se pogoršala.

Inflacija
Drugi From the data presented above it is possible to note the following tendencies: Firstly, EMU and the EU in general have deteriorated their competitive position in respect to their basic competitors the U.S.A. and Japan.
Secondly, in the EMU, only Germany and Austria have reduced their LUC, and in the EU only the United Kingdom, while in Sweden the LUC in the observed period mostly remained on the same level.
Thirdly, LUC in the EU countries that have joined after 2004 have escalated, which may be linked with the Balasha-Samuelson effect.
Fourthly, in the member countries that have been impacted by the debt crisis, primarily in Greece and Spain, and even in Italy, Portugal and Ireland, LUCs have growth at the rates similar to those in the old member countries, Netherlands and Denmark, and globally observed, their competitive position has deteriorated.
A more detailed analysis of the above stated data is possible through an insight into the cumulative growth of the nominal wages, productivity and the LUC (Table 3).
Data indicates, most of all, that there is a significant increase of wages in Greece, Spain and Portugal, countries that have joined the Union in the 1980s. This process was to be expected as the integration assumes the phenomenon of price convergence. However, the growth of nominal wages should be followed by work productivity which had failed to happen in this case. In these countries there is a significant mismatch between the productivity achieved which is as a rule lower than the growth of nominal wages.
It is necessary to point out here also at the following elements which are relevant for the evaluation of the above data. In the EU, there is significant budgetary spending in certain sectors. Highly evident are the funds allocated for environment protection and for agriculture (Todic, 2010, 129). They are in great part placed through the farmers' subsidies. As the farmers are self-employed, subsidies are expressed through increase of wages. However, they represent the result of an increase of transfers from the EU funds, and not the increase of the farmers' costs (Mallaropulos, 2010, 11). This rather applies to the countries of the southern part of the European Union as they represent net budgetary beneficiaries of environmental and farming subsidies.

Bruto domaći proizvod
Analizirajmo sada sumarno stanje konkurentnosti koristeći BDP.  Table 4 -Real effective exchange rate based on the Although the greatest contribution of the ECB work is attributed to its holding of inflation under control in the euro-zone, its overall result, i.e. the fact that certain member countries had taken their own individual routes did bring about the deterioration in the competitive position of the EMU and the EU in respect to the USA and Japan. In the EMU, only Germany and Austria had success in controlling inflation at the beginning of creation of the euro-zone, and in the EU it was also Sweden and United Kingdom that were successful.
Let us test these data once again, this time through the cumulative movement of the LUC and inflation in the nominal values (Table 6).   The available data indicate that imbalances identified in the current account payments that were established between northern and southern EMU members, most of all Greece, Spain, Italy and Ireland, were determined by the differentiations incurred from the mismatch between the level of the LUC and the inflation. These differences could not have been compensated for through the adjustment of the real exchange rate. However, this analysis which is covering economic expressions of the interior imbalances indicates that there is also a need for researching the interior content of economies of the member countries, i.e. lagging behind in making structural changes in the economy, and the absence of exchangeable goods in the southern countries of Europe.

Gross Domestic Product
Let us now analyze summary state of competitiveness by using the GDP. Table 7 indicate that the competitiveness of the EU and EMU in respect to the USA and Japan, when analyzed through the GDP movement, was significantly lowered with the formation of the EMU. The year 2003 represents a turning point (as was also the case with the LUC and inflation), both in the EU and the EMU and also in Japan, but especially in the USA. From that year onwards, there is deterioration in the competitive position of the EU and the EMU, while on the other hand there is growth, i.e. improvement in the competitiveness of Japan and the USA.

Data presented in
From 2004 what begins is also expansion of the current account deficit in the major number of the member countries (Table 9), and from 2007 onwards increased borrowing started in respect to the GDP (Table 10).        In addition to the analysis of competitiveness of the EU and EMU in respect to the main and comparable world competitors, Tables 7 and  8 allow the competitiveness to be followed up within the EU and the EMU. It is obvious that the competitive position was improved only by Germany, Austria and Finland from amongst the EMU members, and amongst the other EU member countries only Sweden was successful. On the other hand, the EMU member country that recorded a particular loss of competitiveness was Spain. An additional problem is the loss of competitiveness of the old industrial nations: Italy, Netherlands, and France. In a word, competitiveness tendencies followed through the GDP confirm previous finds determined in the cases of the LUC and inflation.
In conclusion of this part of work, let us highlight the following. Crisis in the EU is primarily identified with the large public debt and budgetary deficit, and only thereafter the problems related to the deficit in the current account payments are pointed out. This latter deficit is a direct result of different competitive levels of the euro-zone economies. They have derived from different economic structures of the member countries, where an industrially more productive manufacture had concentrated in several countries of northern Europe, while other economic sectors with historically conditioned lagging behind of productivity are situated in the southern countries. In addition, problems with the current payment deficit appear earlier in time (2004) than the public debt crisis (2007) and in that sense coincide with the fall of competitiveness of the European economies. Uniform euro value had clearly outlined this structural imbalance.

Redesigning EMU
The EU structure was constructed over a long period of time and patiently. The basic approach to its creation was the functional approach. Member countries were transferring on to the Union only a small part of their competencies, which provided for the safeguard of their integrity and the longevity of the Union, most often at the expense of the efficient action. Introduction of the EMU represented a tectonic change in this process. National independence in conducting monetary policy was left in the hands of the ECB. On the other hand, no other corresponding mechanisms have been set in place for coordination with other economic policies. In a word, there were no institutions in the EMU to successfully respond to the asymmetric shocks.
With the emergence of the crisis, EMU was actually the first one to be put to a test. The first response was, as it seemed, rather successful. The response was embodied in the concentration of capital and in the constitution of the new institution: the European Financial Stability Fund (ESFS), which was established in 2010. In the decision of the European Council in 2011, it was prescribed that the capital basis of the fund will amount to 750 billion euros, while the credit potential will be 500 billion euros. International Monetary Fund provided 250 billion euros. The IMF conditionalities will be applied for the use of funds . Austerity measures including lowering of the public debt were to be conducted through budgetary savings and this on the side of expenditures, cutting down costs of social benefits, health care and pensions, reducing salaries in the public sector, and on the earning side, through the increase of indirect taxation, especially the value added tax. In addition, some of the institutional changes were envisaged as well, those of supervision (Momirovic, 2012, 84), coordination, and monitoring (Kuenzel, 2011, p. 8).
The question is raised here what are the results of these measures?
Bearing in mind that this process is still ongoing, nevertheless the following may be concluded: Firstly, public debt has not as yet been reduced. It is forecasted for 2012 that there will be its further increase measured as the share in the GDP, and this from 82.3% in 2011 to 83.3% in 2012 (Public Finance EMU, 2011, p. 26).
The second line of thought offers partial solutions which in the climate of reluctance to accept fiscal federalism, political integration, and even euro-bonds, primarily by Germany represents a more realistic approach. Basically the analysis presented in this paper is to be found along this track. Convergence of EMU countries measured by OCA criteria or the level of economic development is possible primarily between the old fifteen EU member countries and/or members having surplus on their current account. This is the way to strengthen the idea of an Europe of clubs, or Europe in two or more gears, as presented early in the Amsterdam Agreement. Along this line of thought some other ideas are also to be found that are offering partial solutions: solution of debts of the over-indebted member countries, and then their exit from the zone; introduction of the European Stabilization Mechanism (ESM 2012), a fund with the capital of 500 billion euro for the solution of eventual future financial problems; establishment of the inter-governmental agreement: Treaty on Stabilization, Coordination and Governance (TSCG) in the European and Monetary Union, of 2012. This treaty was not signed by United Kingdom and the Czech Republic, and is primarily aimed at strengthening fiscal discipline. However, this approach just like the previous one basically does not deal with the development of the real sector of economy, but is creating conditions for its functioning. What conditions, we have best seen in the case of the GIIPS countries. Hence, more active development measures are necessary to be focused on the changes of the economic structure in the heavily indebted countries and those burdened with the current account deficit. Budgetary funds on the level of the EU that are focused on sustainable development, especially growth of competitiveness and employment, are small and amount to some 15% of the EU budget at the annual level, which itself does not exceed 1.2% of the GDP achieved in the EU, while the internal funds of these members countries are allocated for debt repayment.
In view of the above stated, but also mindful of the slow motion of reforms in the EU dependent on the long harmonization procedure, in the medium term it is hard to expect some more significant changes in respect to the situation in the EU. This is an assessment that has its implications for Serbia. It derives from the high degree of financial dependence on euro. This may be documented by the following facts: some 74% of the banking sector in Serbia is in the ownership of the foreign banks, from this number 72% belonging to the banks originating from the EMU (National Bank of Serbia, 2012), in the total banking loans, loans denominated in euro in 2011 have a corporate share of 68.1%, and a retail share of 69.5%, while the remittances from abroad are mostly arriving from the euro-zone and amount to 3.5 billion euro annually (Vasiljevic, Gobeljic, 2011, 172). The euro-zone remaining in the same circumstances over the forthcoming period will force Serbia to adjust its exchange rate to euro, and this within a narrower margin than foreseen by the EMU II, which is possible in the regime of the currency board.

Conclusion
It was determined that the criteria of the optimum currency area are providing analytic ground for research into the European Monetary Union. The analysis of cost and price competitiveness indicated that the competitiveness in the euro-zone had deteriorated in respect to the competitiveness of the USA and Japan. An even sharper disparity in the competitiveness was identified among the EMU members. The EMU anticrisis mechanisms and especially the European Financial Stabilization Fund have help to reduce the gap in the current account deficits and strengthening of financial responsibility. However, implementation of these mechanisms had also contributed to the extension of recession, especially the growth of unemployment. In a longer-term, implementation of structural measures should provide an enhancement for the competitive position of the member countries. In medium-term, bearing in mind institutional time-consuming pace of the harmonization, no significant changes are to be expected in the EMU functioning. Hence the economy of Serbia, with high Eurisation, should secure, through new mechanisms, a stricter tracking of the euro exchange rate.