Category Archives: Euro area growth

5/2/19: The Myth of the Euro: Economic Convergence


The last eight years of Euro's 20 years in existence have been a disaster for the thesis of economic convergence - the idea that the common currency is a necessary condition for delivering economic growth to the 'peripheral' euro area economies in the need of 'convergence' with the more advanced economies levels of economic development.

The chart below plots annual rates of GDP growth for the original Eurozone 12 economies, broken into two groups: the more advanced EA8 economies and the so-called Club Med or the 'peripheral' economies.


It is clear from the chart that in  growth terms, using annual rates or the averages over each decade, the Euro creation did not sustain significant enough convergence of the 'peripheral' economies of Greece, Italy, Portugal and Spain with the EA8 more advanced economies of the original euro 12 states. Worse, since the Global Financial Crisis onset, we are witnessing a massive divergence in economic activity.

To highlight the compounding effects of these annual growth rates dynamics, consider an index of real GDP levels set at 100 for 1990 levels for both the EA8 and the 'peripheral' states:

Not only the divergence is dramatic, but the euro area 'peripheral' economies have not fully recovered from the 2008-2013 crisis, with their total real GDP sitting still 3.2 percentage points below the pre-crisis peak (attained in 2007), marking 2018 as the eleventh year of the crisis for these economies.  With Italy now in a technical recession - posting two consecutive quarters of negative growth in 3Q and 4Q 2018 based on preliminary data, and that recession accelerating (from -0.1% contraction in 3Q to -0.2% drop in 4Q) we are unlikely to see any fabled 'Euro-induced convergence' between the lower income states of the so-called Euro 'periphery' and the Euro area 8 states.

5/2/19: The Myth of the Euro: Economic Convergence


The last eight years of Euro's 20 years in existence have been a disaster for the thesis of economic convergence - the idea that the common currency is a necessary condition for delivering economic growth to the 'peripheral' euro area economies in the need of 'convergence' with the more advanced economies levels of economic development.

The chart below plots annual rates of GDP growth for the original Eurozone 12 economies, broken into two groups: the more advanced EA8 economies and the so-called Club Med or the 'peripheral' economies.


It is clear from the chart that in  growth terms, using annual rates or the averages over each decade, the Euro creation did not sustain significant enough convergence of the 'peripheral' economies of Greece, Italy, Portugal and Spain with the EA8 more advanced economies of the original euro 12 states. Worse, since the Global Financial Crisis onset, we are witnessing a massive divergence in economic activity.

To highlight the compounding effects of these annual growth rates dynamics, consider an index of real GDP levels set at 100 for 1990 levels for both the EA8 and the 'peripheral' states:

Not only the divergence is dramatic, but the euro area 'peripheral' economies have not fully recovered from the 2008-2013 crisis, with their total real GDP sitting still 3.2 percentage points below the pre-crisis peak (attained in 2007), marking 2018 as the eleventh year of the crisis for these economies.  With Italy now in a technical recession - posting two consecutive quarters of negative growth in 3Q and 4Q 2018 based on preliminary data, and that recession accelerating (from -0.1% contraction in 3Q to -0.2% drop in 4Q) we are unlikely to see any fabled 'Euro-induced convergence' between the lower income states of the so-called Euro 'periphery' and the Euro area 8 states.

15/5/18: Beware of the Myth of Europe’s Renaissance


My article for last Sunday's Business Post on why the Euro area growth Renaissance is more of a fizzle than a sizzle, and what Ireland needs to do to decouple from the Go Slow Europe: https://www.businesspost.ie/business/beware-myth-europes-renaissance-416318. Hint: not an Irexit... and not more Tax Avoidance Boxes...

22/1/18: Interest Rates, Demographics and Secular Stagnation: Euro Area 2018-2025


An interesting recent paper from ECB on the link between monetary policy (interest rates) and secular stagnation. Ferrero, Giuseppe and Gross, Marco and Neri, Stefano, ECB Working Paper, titled "On Secular Stagnation and Low Interest Rates: Demography Matters" (July 26, 2017, ECB WP No. 2088: https://ssrn.com/abstract=3009653) argues that adverse demographic developments can account for a long-run (since the mid-1980s) trend decline in real and nominal interest rates. In particular,  demographic factors linked to secular stagnation, have "exerted downward pressures on real short- and long-term interest rates in the euro area over the past decade."


Using EU Commission projected dependency ratios to 2025, the authors "illustrate that the foreseen structural change in terms of age structure of the population may dampen economic growth and continue exerting downward pressure on real interest rates also in the future".

Specifically, "the counterfactual projections suggest an economically and statistically relevant role for
demography. Interest rates would have been higher and economic activity growth measures stronger under the assumed more favorable historical demographic assumptions. Concerning the forward-looking assessment, interest rates would remain at relatively low levels under the assumption that demography develops as projected by the EC, and would rise visibly only under the assumed more favorable forward paths for dependency ratios."

Here are the dependency ration projections (red dots = EU Commission report projections; purple dots = 2015 outrun remains stable over 2016-2025 horizon, green line = mid-point between EU Commission forecast and static 2015 scenario):

And now, translating the above dependency ratios into macroeconomic performance:
Notice the following: under both, the adverse (European Commission estimates) and the moderate (central - green) scenarios, we have real GDP growth materially below 1 percent by 2025 and on average, below historical average levels for pre-crisis period. This is secular stagnation. In fact, even under the benign scenario of no demographic change from 2015, growth rate is unimpressive. Potential output panel confirms this.

29/9/17: Eurocoin: Eurozone growth is still on the upside trend


The latest data from Eurocoin - an early growth indicator published by Banca d’Italia and CEPR - shows robust continued growth dynamics for the common currency GDP through August-September 2017. Rising from 0.67 in August to 0.71 in September, Eurocoin posted the highest reading since March 2017 and matched the 3Q 2017 GDP growth projection of 0,67.

The charts below show both the trends in Eurocoin and underlying GDP growth, as well as key policy constraints for the monetary policy forward.




The last chart above shows significant gains in both growth and inflation over the last 12 months, with the euro area economy moving closer to the ECB target zone for higher rates. In fact, current state of unemployment and growth suggests policy rates at around 2.4-3 percent, while inflation is implying ECB rate in the regions of 1.25-1.5 percent.


In summary, euro area recovery continues at relative strength, with growth trending above the post-crisis period average since January 2017, and rising. Inflationary expectations are starting to edge toward the ECB target / tolerance zone, so October ECB meeting should be critical. Signals so far suggests that the ECB will outline core modalities of monetary policy normalisation, which will be further expanded upon before the end of 2017, setting the stage for QE unwinding and some cautious policy rates uplift from the start of 2018.