A dire set of Q4 GDP data showed that much of the euro area was either in recession, or heading in that direction. This week’s COTW takes a look at how individual economies have fared since the introduction of the common currency. Despite their recent crises, Ireland and Spain stand out as the big winners – in GDP terms at least. By contrast, Italy and Portugal have effectively flat lined throughout the common currency-era.
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Economic performance within the euro member states has diverged wildly in recent years. Greece, for example, has experienced a modern day Great Depression. Meanwhile, Germany, recent weakness notwithstanding, has enjoyed one of the most buoyant recoveries of the major advanced economies. This should not come as a surprise. Since the introduction of the euro, the individual countries have not followed a uniform path.
During the early years, the economies of Greece, Ireland and Spain, managed to grow much faster than the euro area as a whole. Blessed with favorable demographics, and a less cautious consumer, these economies rode the credit-fuelled early 2000s with gusto. However, as is now clear, the boom eventually led to spectacular bust. And all three have experienced deep and prolonged recessions. Nevertheless, in Ireland and Spain at least, the level of economic output remains far higher than it was when the common currency was first introduced.
By contrast, Italy and Portugal, weighed down by structural inefficiencies and a burdensome public sector, have been bumping along the bottom ever since adopting the euro. Absent from the initial boom, yet very-much present for the recent bust, both have effectively flat-lined over the past decade. Indeed, after sharp falls in Q4, the level of output in both is now back where it was in 2000.
The ‘core’ northern economies of Germany and France lie somewhere in the middle. Among the most advanced when the euro was first introduced, they were initially outpaced by their free-spending counterparts in the south. Nevertheless, recent events have showcased their economies’ underlying strength and have, for now at least, avoided much of the pain witnessed in the periphery.
Where does the story go next? Crippled by the recent crisis, many countries in the periphery have been forced to undertake substantial fiscal and structural adjustment. The short-term impact of these policies has been clear: declining output and rising unemployment. However, the potential longer term benefits of fiscal sustainability and a more competitive economy may mean that this is a price worth paying. That is what European policymakers are banking on anyway. Are they right? Only time will tell.
