Europe’s True Missing Link: Economic Convergence
Posted by hkarner - 4. Januar 2017
Source: The Wall Street Journal
Politics will be high on the 2017 agenda as the ECB extends its quantitative-easing program
Monetary policy has done a lot for Europe in recent years. Most of all, it has kept the euro intact. But the European Central Bank’s ability to create economic harmony in the eurozone is limited.
Ever since Mario Draghi’s 2012 pledge to do “whatever it takes” to keep the euro together, markets have bought into the idea. The gap between northern and southern European government bond spreads compressed. Borrowing rates for small- and medium-size enterprises have converged across the big four economies—Germany, France, Italy and Spain—which together account for three-quarters of the currency bloc’s gross domestic product. The aggregate level of government debt has stabilized at just over 90% of GDP, helped by steady eurozone growth.
But the problem is that other indicators have diverged—and the crisis showed that national divergence matters, even under the cover of reasonable aggregate performance. Look again at the big four. Before the crisis, unemployment rates were within a few percentage points of each other; now they stand at 4.1% in Germany, 9.7% in France, 11.6% in Italy and 19.2% in Spain, according to Eurostat.
In Germany, government debt has been falling steadily since 2012 and is now close to 70% of GDP, while it has risen in Spain and France to around 100% of GDP and in Italy to 135% of GDP. And while the German and French economies bounced back and regained their precrisis output levels in 2011, Spain has yet to do so despite current strong growth. And Italian GDP is barely above its 1999 level.
ECB policies have made a difference. Economists at Barclays estimate that without bond purchases, debt levels in Spain and Italy would have risen more sharply.
Lower interest rates thanks to the ECB have helped. But the bigger factor, Barclays argues, is that growth has been better than it otherwise might have been, in part because ECB policies have taken the market pressure off governments. Fiscal policy has turned less austere, improving current conditions, but reforms that might boost growth and increase convergence in the long run have slowed.
The ECB will continue with bond purchases for quite some time. In December, it kicked the can to the end of 2017 and is set next year to buy €780 billion ($818.38 billion) of debt. That should help keep a lid on bond-market pressures. But quantitative easing can’t last forever.
The big focus has been on the political calendar in the eurozone in 2017. But the strains in politics have been exacerbated by a crisis caused by a failure of economic convergence. The eurozone is still a monetary union devoid of economic union, says Hermes Investment Management. That is the real source of tension.