eco TV Week

Blinded by the light? Convergence and differences in the euro area

7/13/2017

Economic growth in the euro area is robust. This dynamism is shared amongst its members yet important structural differences remain. The favourable cyclical environment calls for an economic policy to address these so as to boost long term growth and the resilience of individual countries in case of downturns.

William DE VIJLDER

TRANSCRIPT // Blinded by the light? Convergence and differences in the euro area : July 2017

Are we blinded by the light? Strong euro area growth implies we’re running the risk of no longer seeing the structural gaps.

Euro area growth is robust and this performance is widely shared amongst its members. 7 out of 8 countries have a manufacturing PMI way above the 50 line (except Greece which is just above that level). For the services PMI 4 out of 5 are in that position (with Italy lagging a bit).  

In addition, convergence has increased as witnessed by a decline since the start of EMU of the dispersion in terms of

  • GDP growth
  • core inflation
  • fiscal balance
  • current account balance 
  • Although the Great Recession had seen increased divergence in terms of unemployment and output gap, this has now improved a lot.

The strong cyclical performance and convergence imply we run the risk of not seeing the structural differences, which remain considerable. Just to name a few:

  • Public sector debt
  • Private sector debt
  • Productivity levels and growth
  • Non-performing loans

 

Structural differences are an important issue. They imply that in the long run some countries will be able to grow faster than others so citizens in one country may feel worse off than citizens in another euro area member state. They also imply that some countries will be less resilient to shocks than others, because they have a high debt burden or because non-performing loans are still high.

As a consequence, boosting potential GDP growth and economic resilience are important objectives for structural economic policy.

The current growth environment provides a good opportunity to step up structural reform efforts:

  1. There no longer a need for short-term fire-fighting
  2. To the extent that some of these efforts could act as a drag in the short run, countries are better positioned now to cope with them.

Finally, this is a clear example of a win-win policy whereby individual efforts make EMU as a whole more robust.

View more videos Eco TV Week

On the Same Theme

IFRS 9 first time adoption: Significant cost differentials amongst banks 11/28/2018
The adoption of IFRS 9 accounting standard on 1st January 2018 significantly changes the impairment model for bank assets. Expected credit losses (and not only incurred losses) are now recognised using a more prospective approach than previously required. IFRS 9 introduces an intermediary category for performing assets whose credit risk has nonetheless increased significantly since their initial recognition, even though no credit event has occurred. Such “phase 2” led banks to recognise additional provisions for impairment whereas the quality of their portfolios remained unchanged. The decline in common equity tier 1 attributable to IFRS 9 should not be interpreted as a decline in banks’ loss absorbing capacity. Some of the prior “unexpected losses”, previously covered by regulatory capital, are now covered by accounting provisions replacing the former.
Strengthening resilience 11/23/2018
Support seems to be growing for the proposal of France and Germany for a eurozone budget. This would contribute to a much needed enhancement of economic resilience, that is the ability to cope with shocks. Resilience can also be strengthened through private and public risk sharing and policies seeking to boost potential growth. Boosting resilience is all the more important considering that risks to global growth seem to be tilted to the downside.
Cooler sentiment 11/9/2018
Sentiment indicators continue their softening trend and the flash estimate points towards weak third quarter GDP growth. Yet drivers of final demand continue to point towards ongoing good growth in the upcoming quarters. Data in the coming weeks as well as developments concerning Brexit and US trade policy will be key to confirm or tune down this assessment. 
Eurozone: Credit pulse 10/31/2018
After a rebound in June, the pulse of lending stabilized in September. This dynamism is due to the continued acceleration of loans to non-financial corporations and, to a lesser extent, households. Loan demand by households remains more favorably oriented than that of non-financial corporations, while the credit conditions continue to ease but not as fast as in August.
Eurozone: heading towards slower growth 10/26/2018
Judging by recent macroeconomic indicators, beating consensus expectations is becoming increasingly challenging. Moreover, certain indicators are now close to or even below their long term average. These developments point towards a softer growth outlook. At yesterday’s ECB press conference, Mario Draghi described this as a loss of momentum whereby growth normalises, coming from a pace which was well above the potential growth rate. The view that it’s a normalisation and not a downturn is based on a combination of factors: income growth, corporate earnings growth, credit growth, low interest rates. Uncertainty has increased (Brexit, market volatility, Italy’s budget) but to quote the ECB “risks remain balanced”.
ECB: still confident 10/26/2018
The ECB is still confident. That is the message from Mario Draghi’s press conference following the Governing Council meeting.
Strengthening the eurozone: prospect of progress at last? 10/19/2018
The German finance minister has made a plea for the creation of a pan-European unemployment fund. Being able to borrow from the fund would require having contributed in the past as well as having met certain criteria in terms of economic policy. This form of risk-sharing would soften the impact of downturns and hence would be an important contribution to strengthen the eurozone.
The long road to normalisation 10/18/2018
Growth has been moderating in 2018, although remaining above potential. Prices pressure are increasing as signalled by high levels of capacity utilisation, declining unemployment and rising wages. As underlying inflation is projected to move towards the ECB’s 2% ceiling, the central bank decided to reduce net asset purchases and possibly halt them from January 2019. Policy rates will remain unchanged at least through the summer of 2019. The policy mix should stay expansionary and GDP growth may moderate towards its trend rate in 2019.
Eurozone: Banking systems slightly decrease their exposure to sovereign debt 9/26/2018
With the exception of Italian and Portuguese banking systems, the main eurozone banking systems have reduced their exposure to sovereign debt between July 2017 and July 2018. The exposure of the eurozone banking system as a whole has decreased from 5.1% of banking assets to 4.8% over the same period. Most of the banking systems have reduced their global exposure to sovereign debt, especially towards domestic debt securities but less towards those of other Member States. Greek and, to a lesser extent, Spanish banks have decreased their exposure towards domestic sovereign debt. However, they also have increased their exposure towards sovereign debt of other Member States. Portuguese and Irish banking systems focused their buying on debt securities issued by other Members States. Finally, if Italian banks have, like Portuguese banks, increased their global exposure, their buying of domestic debt securities has grown more than twice as strong as their buying of sovereign debt of other Member States.
The eurozone 10 years after 9/19/2018
In the run-up to the financial crisis, low interest rates had stimulated real estate investment and economic activity, in particular in the periphery countries. Household debt increased rapidly and housing bubbles emerged. The Lehman Brothers bankruptcy made an abrupt end to the buoyancy. Property bubbles burst and bank lending dried up. Government debt increased rapidly because of automatic stabilisers, fiscal stimulus packages and support to the financial sector. Ten years later, indebtedness of the non-financial sector in the core and the periphery countries is virtually the same, although substantially higher than before the crisis. The mix is quite different though. In the core countries, government, household and non-financial corporations have all increased their indebtedness as low interest rates make borrowing attractive. The periphery has seen deleveraging by households and non-financial corporations but government debt has risen very significantly. This increases the sensitivity of public finances to the cycle and bond yields.

ABOUT US Three teams of economists (OECD countries research, emerging economies and country risk, banking economics) make up BNP Paribas Economic Research Department.
This website presents their analyses.
The website contains 1959 articles and 543 videos