Blog Post

Chart of the week: The real test of the euro

The single most pressing threat to the integrity, and perhaps also to the existence, of the euro is the depth of the recession in southern European member states, and their bleak economic outlook, as I argued in a policy contribution we published last week. Figure 1 shows that following three decades of relatively stable GDP […]

By: Date: February 4, 2013

The single most pressing threat to the integrity, and perhaps also to the existence, of the euro is the depth of the recession in southern European member states, and their bleak economic outlook, as I argued in a policy contribution we published last week.

Figure 1 shows that following three decades of relatively stable GDP per capita compared to the USA, southern Europe is expected to fall behind quite dramatically.

Figure 1: GDP per capita in major geographical regions of the EU (USA = 100), 1950-2017

Source: Figure 1 in Darvas, Zsolt (2012) ‘The euro crisis: ten roots, but fewer solutions’, Bruegel Policy Contribution 2012/17, October. Note: GDP is based on purchasing power parity dollars; median values are indicated for the groups, which are as follows: West: Austria, Belgium, France, Germany, and the Netherlands; South: Greece, Italy, Portugal, and Spain; North: Denmark, Finland, Sweden, Ireland, and the UK; Central: the Czech Republic, Hungary, Poland, Slovakia, and Slovenia; East: Estonia, Latvia, Lithuania, Bulgaria, and Romania.

Figure 2 shows country specific data: GDP levels at constant prices, using various vintages of the IMF’s World Economic Outlook (WEO). The Greek outlook has worsened in every update of the WEO since April 2008 and according to the latest WEO, the cumulative real GDP fall is expected to be 22 percent. The situation is not that bad, but also worrying in Italy, Portugal and Spain.

Figure 2: GDP outlook five years ahead, as projected by the IMF at different dates (2007=100)

 

Source: IMF World Economic Outlook published on the dates indicated in the legend. Note: the two vertical lines indicate 2007 and 2012. GDP is measured at constant prices.

The employment situation is similarly miserable (Figure 3): in 2008 there were more than 4.5 million employees in Greece, which is expected to fall by 21 percent to 3.6 million by 2013 – the lowest figure during time period for which WEO reports data, 1980-2013. Employment developments are also very poor in Spain and Portugal, yet in Italy jobs were well preserved.

Figure 3: Employment outlook two years ahead, as projected by the IMF at different dates (2007=100)

Source: IMF World Economic Outlook published on the dates indicated in the legend. Note: the two vertical lines indicate 2007 and 2012.

If the recession continues to deepen in Greece, social tensions could escalate, which may lead to domestic political paralysis. Under such circumstances, cooperation between euro-area partners and Greece, including financial assistance that has already been granted, could come to an end, leading to an accelerated and possibly uncontrolled exit from the euro area, causing devastating consequences for economically stronger countries as well.

The top priority should be preserving the integrity of the euro area and offering southern euro countries improved prospects. Structural reform and appropriate fiscal consolidation in southern Europe, wage increases and slower fiscal consolidation in economically stronger euro-area countries, a weaker euro exchange rate, debt restructuring and a European investment programme should be part of the arsenal.

Economic growth in southern Europe would gradually help to improve the unemployment situation, public finances, asset prices, balance sheet of banks, and would reverse capital outflows. And without the problems of southern euro-members, western and northern members would be able to overcome their banking woes and the other roots of the euro crisis would have much lower relevance.

It is high time to address the most pressing issue of the euro crisis.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Topics

Comments

Read article More on this topic

Blog Post

Pia Hüttl
jaume

Northern Ireland and EU funds

EU funding for the UK has risen considerably since 2000, but funding predominantly goes to rural and less developed areas, meaning that Northern Ireland, Scotland and Wales receive more funding relative to their GDP than England.

By: Pia Hüttl and Jaume Martí Romero Topic: European Macroeconomics & Governance Date: May 3, 2016
Read about event More on this topic

Past Event

Past Event

Fighting corruption: from headlines to real impact

Despite recent efforts to tackle corruption there is not much evidence that these strategies are producing results. Why is this the case and what can we do to improve the situation?

Speakers: Carl Dolan, Mihaly Fazekas, Alina Mungiu-Pippidi and Alessio Terzi Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 28, 2016
Read about event More on this topic

Past Event

Past Event

Active labour market policies, what works?

How are Europe's labour markets performing, and what policies can best help them function?

Speakers: Alfonso Arpaia, Clyde Caruana, Grégory Claeys, Dan Finn, Regina Konle-Seidl, Alfred Mifsud, Godwin Mifsud, Edward Scicluna and Paul Swaim Topic: European Macroeconomics & Governance Location: Mediterranean Conference Centre Triq l-Isptar, Valletta, Malta Date: April 27, 2016
Read article More on this topic More by this author

Blog Post

Jérémie Cohen-Setton

Understanding HM Treasury’s Brexit analysis

What’s at stake: The UK will hold a referendum on its membership of the EU on June 23rd 2016. Her Majesty’s Treasury released an assessment of the impact of Brexit finding that the economy would be between 3 and 7% smaller in 2030 if the UK left the EU than it would be if it stayed in.

By: Jérémie Cohen-Setton Topic: European Macroeconomics & Governance Date: April 25, 2016
Read about event More on this topic

Upcoming Event

25 
May
2016
12:30

Lessons for the euro from early US monetary and financial history

The United States has a monetary union that many look to when considering the future of the EU. But how easy was it really to create such a union and what can Europe learn from the US process?

Speakers: Jeffry Frieden and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Blog Post

jaume

Are regional governments causing deficit overshooting in Spain?

Spain once again missed its deficit target in 2015 and it seems unlikely that 2016 will be any better. The central government has pointed to regional deficits as being the cause of the fiscal slippage. However, regional governments claim that their deficit is due to under-financing and overly strict deficit targets.

By: Jaume Martí Romero Topic: European Macroeconomics & Governance Date: April 19, 2016
Read about event More on this topic

Past Event

Past Event

CANCELLED: The Search for Europe

This event has been cancelled because of an unforeseen change in the calendar of the main speaker.

Speakers: Francisco González, Sylvie Goulard, Veronica Nilsson, John Peet, Javier Solana and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 19, 2016
Read article More on this topic

Blog Post

IMG_20151009_103117 (3)
Karen E. Wilson
Guntram B. Wolff

Youth unemployment in the Mediterranean region and its long-term implications

Youth unemployment in the Mediterranean region has consequences for the whole of Europe. Tackling youth unemployment in the region must continue to be a high policy priority.

By: Nuria Boot, Karen E. Wilson and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: April 13, 2016
Read article More on this topic

Opinion

Grégory Claeys
Zsolt Darvas

How to reform EU fiscal rules

The current inefficient European fiscal framework should be replaced with a system based on rules that are more conducive to the two objectives of public debt sustainability and fiscal stabilisation.

By: Grégory Claeys and Zsolt Darvas Topic: European Macroeconomics & Governance Date: April 12, 2016
Read article More on this topic More by this author

Opinion

Guntram B. Wolff

Making the EU-Turkey refugee deal work

The EU deal with Turkey reached on 18 March is problematic, but without a deal the EU’s external borders would have collapsed completely. Now the EU needs to support Greece and increase the number of refugees taken directly from Turkey.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: April 11, 2016
Read article More on this topic

Opinion

fratzscher-03
Reint_Gropp_m
p2-Kotz
jan-pieter-krahnen
odendahl-june14-1409577172
Beatrice Weder di Mauro
Guntram B. Wolff

Mere criticism of the ECB is no solution

What would happen if the ECB failed to respond to the excessively low inflation and the weak economy? And what economic policy would be suitable under the current circumstances, if not monetary policy?

By: Marcel Fratzscher, Reint Gropp, Hans-Helmut Kotz, Jan Krahnen, Christian Odendahl, Beatrice Weder di Mauro and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: April 10, 2016
Read article More on this topic More by this author

Blog Post

Zsolt Darvas

The structural budget balance limbo

A key indicator in the EU’s fiscal framework is the structural budget balance, but estimates of the indicator by the European Commission, IMF and OECD are revised a lot from one year to the next, sparking concerns among some EU finance ministers.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: April 7, 2016
Load more posts