Growth differences between EA Member States since the crisis

Ismael Valdes Fernandez

Quarterly Report on the Euro Area (QREA), 2014, vol. 13, issue 2, 7-20

Abstract: Although overall GDP growth differences among euro area countries have not increased since the global financial and sovereign crises, cyclical divergences have reached record highs. Differences in potential growth have generally remained contained, but this masks a worrying trend of income divergence. As countries have had to deal with the simultaneous impact of the sovereign, banking, and private debt crises, differences in deleveraging needs across countries in both the private and the public sector have entailed significant cross-country differences in domestic demand, particularly investment, resulting in large cyclical divergences. Corporations have played a greater role in this process than households. While some of the sources of cyclical divergences are progressively easing (e.g. fiscal consolidation or financial fragmentation), others are likely to be more protracted (e.g. deleveraging). Some of the drivers of cyclical divergences also have a supply-side dimension, and are responsible for the large fall in potential growth in most "vulnerable" economies since the crisis. The contributions of labour and capital have been the main forces behind differences in potential output, and their drivers are unlikely to subside rapidly. Despite significant improvements in cost-competitiveness in some vulnerable countries, external competitive rebalancing has been so far only a modest force of cyclical rebalancing. However, reforms put in place at the EU/euro area level (Banking Union) and Member State level (notably increased market flexibility in VMS) should help dampen forces of growth divergence in the euro area.

Keywords: economic; growth (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:euf:qreuro:0132-01

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