As Irving Fisher noted almost eighty years ago: “The old and apparently still persistent notion of “the” business cycle, as a single, simple, self-generating cycle,…is a myth. Instead of one cycle, there are many co-existing cycles, constantly aggravating or neutralising each other, as well as co-existing with many non-cyclical forces” (Fisher (1933)). Historically, the credit cycle appears to have been just such a phenomenon. But why should we care? One reason might be that credit booms and busts are systematically related to the incidence of crises, with their associated social costs. Using the filtered credit series for the 12 countries, and the dating of banking and currency crises from Bordo et al (2001), it is possible to test this hypothesis. 16 Over the sample period, these countries were in a state of banking and/or currency crisis anywhere between 10% and 25% of the time. This broadly matches the frequency of the credit cycle.
Macro costs and micro benefits: The Eurozone has so far failed to make its member states wealthier quicker (the non-euro EU states are constantly growing faster on average) or to make them converge structurally. Rather, one could argue that the opposite is true. A truly strong measurable result of the euro is lower and less volatile inflation. This is hard to see as a bonus for our country, where we are consistently achieving the same objective with our own currency. The oft-mentioned bonus of lower interest rates due to the euro does not apply to us either. We have long known what it’s like to live with rates below the Eurozone level. Likewise, it’s hard to believe that the euro will deepen our trade relations with the euro countries given that we are one of the few countries enjoying not only growing trade, but also a constantly rising trade surplus with Germany. The euro has micro benefits at firm level, but unfortunately they come with the aforementioned macro costs. The latter are constantly rising and their final size and structure are impossible to quantify. Besides the known contribution to the stability funds, they include mandatory participation in the banking union, which is another unfinished structure. For a country of our type, currency arrangement and monetary history, joining the Eurozone is generally an extremely tough question. It was ever thus, but it is currently all the more so.