European View

Re-balancing the eurozone economies through productivity

by Riccardo Sorrentino

IT
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Italy zero, France zero: it is a worrying result. One misstep is enough to fall back into recession. On the contrary, Germany's economy is exceeding all expectations with a growth by 0.4% and, together with Spain and Holland is responsible for the Eurozone’s 0.3% GDP growth in the second quarter, meaning a yearly growth of 1.2%, which is the same pace as a slower US.

One could conclude from the European GDP figures yesterday that the international framework is weak everywhere, that the slowdown had been forecast, and that we shouldn't be too concerned about the data of a single quarter, as bad as it looks.

Nonetheless, numbers confirm a trend weighing on the future of the monetary union.

The Eurozone is not integrating, and it continues to be a highly inefficient currency union.

Actually, this is not surprising: in mid-2015, a study carried out by the ECB and published on the Economic Bulletin pointed out that “the actual convergence between the countries of the Eurozone was quite weak after the launch” of the common currency. On the contrary, some signals of divergence have since emerged (and Italy has been the “worse” country from this point of view).

Things do not seem to have changed since then. And the problem is not just the imbalance between countries with a surplus (Germany) and those with a deficit in their external balance. It is true, looking at the numbers the second quarter of the year, Germany seems to still rely heavily on external demand – although it is weak in the current phase – while German consumers spend less than would be optimal.

Andreas Rees of Unicredit exhorted investors not to overrate this aspect: “In the last ten quarters, net exports have been negative and they have weighed on the general growth on seven different occasions,” he wrote. “Then, the last increase is not the continuation of the German trend to spend less (or to export at the expense of other countries), but just a temporary blip. Stay tuned…”

Nonetheless, Germany still has an unemployment rate of 4.2%, France of 9.9% and Italy of 11.5%. That’s a big gap. From the labor market's point of view, the improvement registered from 2013 has reduced the distance between the countries in the eurozone only slightly, which instead had really narrowed in 2008, before the economic crisis.

The point is that common currency has changed everything. There are no longer monetary shortcuts like devaluation (admitting that it works, which is not always true). Nothing is nominal anymore (starting from debt) and everything is real. Therefore, it is not surprising that for some the euro is like a “cage,” because it imposes more discipline.

The only possible convergence occurs through a productivity increase, which is faster in the weakest economies. On the other end, the business policies and strategies implemented almost everywhere have gone in the opposite direction.

“After the introduction of the euro, assets have been increasingly destined to sectors with a low marginal productivity (and therefore a low productivity) but high income,” said the ECB one year ago: services protected from competition, including retail and communications networks.

In Italy and Spain, that should have made more effort than others, productivity remained low also in the manufacturing sector, indicating a weakness of the “environment” in which companies were and are working.

To fix the situation there is not so much a need for a weak euro, low rates and quantitative easing, nor fiscal deficits or slow public investments (even if they might be useful if these measures are carefully chosen and implemented). What is needed is capital – technological, human, organizational, social. And possibly a reconsideration (and, if needed, a makeover) of the Eurozone project that during the economic crisis – that was out of the ordinary but unfortunately also real and painful – has showed its many limitations.


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