Euro zone: persistent imbalances

Increasing internal imbalances, Italy faces the double trap of debt and weak growth. A few days before the European elections, the economists of the French Observatory of Economic Conditions (OFCE) have alerted about the economic challenges that await the next Parliament for the next five years.

Twenty years after the creation of the euro area, economic imbalances remain firmly anchored. The economic crisis of 2008, the changes of political power with the rise of populism, contributed to increase the divisions within the monetary zone. A few days before the European elections, the president of the observatory, Xavier Ragot, regrets that the debate “focuses in France on events such as Brexit […] Now, it is the long time that is worrying, d ‘here five years,’ he warned. “There are key issues for the coming years that drive economic policy direction and are not discussed” in the campaign, he added.

Faced with divergences, “the important issue is social Europe with the issue of the labor market to converge Europe. We need a deeper reflection on the minimum wage, the portability of labor rights and the reduction of inequalities, a European unemployment insurance “.

Current balances still unbalanced
The differences between the states of the monetary union are particularly striking in terms of current account balances. In a previous policy brief, economists at the research laboratory had shown that “the process of divergence of current account balances has been sharply halted after 2009 and external deficits have disappeared in almost all countries in the euro area” . The crisis of 2008 and the sovereign debt will lead to “convergence or resorption of imbalances within the euro area,” said Bruno Ducoudre at a press conference.

But, “it is a partial resorption. There remain divergences within the euro area and it is an asymmetrical evolution. Only countries with a deficit will reduce their deficit while surplus countries will widen their surpluses like Germany or the Netherlands. This observation raises questions about the sustainability of the euro area “.

For the OFCE, this imbalance “comes clearly from Germany and the Netherlands”. In 2018, prices were 11% too low in Germany compared to the average of the euro zone, which favors its exports, while those of France were 7% too high. Faced with this situation, the research organization underlines “the need for convergence between the countries of the European Union” and recommends “stronger inflation in countries that need to lose relative competitiveness”.

Germany in difficulty
For Xavier Ragot, “the German debate is complex. There is a desire for reconvergence, even if there is a radicalization of the German right. In 2015, it was never thought that the Germans would introduce a Smic at a high level. The prospects of increasing the SMIC are quite important.

Faced with the difficulties of the industry, Germany could change its commercial strategy.

“Two-thirds of Germany’s exports came from within the eurozone when the zone was created, now it’s two-thirds outside the zone. With Trump’s trade policy, Germany will have to reposition its industrial machine within the euro zone, “he said.

In 2018, the industrial engine of the first European economy stalled. The adoption of new anti-pollution standards and the slowdown in world trade have led to a slowdown in the German automotive industry. As a result, German growth slowed sharply last year to 1.5%, compared with 2.1% on average over the period 2014-2017, and the European Commission lowered its activity forecasts for this year and 2020 to 1%. , 3% and 1.2%, against 1.5% and 1.4% previously.

Italian risk
Among the countries in the euro area, the situation in Italy is of particular concern. The peninsula’s economy faces the double trap of high debt and low growth. At the level of public finances, the period from the early 1980s to 1992 saw “the explosion of the public debt, from 54% of GDP in 1980 to about 117% in 1994”. Economist Céline Antonin says that the recession has resulted in “a decline in growth and a burden of interest that has weighed.”

For the researcher, several factors can explain these difficulties. The first reason is that “the industry is specialized in sectors with low technological content and since 2000, in increased competition with low-cost countries”. Second factor, “Italian companies are suffering from ‘dwarfism’. There are more microenterprises in Italy and are half as productive. These companies are specialized in small crafts.

In addition to business demography, the economist highlights the North-South divide, which is still marked.

“There is a decline in value added per worker that has been stronger in the South than in the North, knowing that the level of productivity was already three times higher in the North.”

The gaps widened and since 2008, “the unemployment gap between North and South has increased by 25%”. Faced with this impasse, the OFCE recommends “to associate public investment with industrial policy and to exclude public investment from the calculation of the primary structural balance which serves as a reference in the opening of an excessive deficit procedure”.

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