24/2/19: Europe of Divergence: Euro and the Crisis Aftermath

A promise of economic convergence was one of the core reasons behind the creation of the Euro. At no time in the Euro area history has this promise been more important than in the years following the series of the 2008-2013 crises, primarily because the crisis has significantly adversely impacted not only the 'new member states' (who may or may not have been on the 'convergence path' prior to the crisis onset), but also the 'old member states' (who were supposed to have been on the convergence path prior to the crisis). The latter group of states is the so-called Euro periphery: Greece, Italy, Spain and Portugal.

So have the Euro delivered convergence for these states since the end of the Euro area crises, starting with 2014? The answer is firmly 'No'.

 The chart above clearly shows that since the onset of the 'recovery', Euro area 8 states (EA12 ex-periphery) averaged a growth rate of just under 2.075 percent per annum. The 'peripheral' states growth rate averaged just 1.623 percent per annum. In simple terms, recovery in the Euro area between 2014 and 2018 has been associated with continued divergence in the EA4 states.

This is hardly surprising, as shown in the chart above. Even during the so-called 'boom' period, peripheral states average growth rates were statistically indistinguishable from those of the EA8. Which implies no meaningful evidence of convergence during the 'good times'. The picture dramatically changed starting with 2009, starting the period of severe divergence between the EA8 and EA4.

In simple terms, the idea that the common currency has been delivering on its core promise of facilitating economic convergence between the rich Euro area states and the less prosperous ones holds no water.

5/2/19: The Myth of the Euro: Economic Convergence

The last eight years of Euro's 20 years in existence have been a disaster for the thesis of economic convergence - the idea that the common currency is a necessary condition for delivering economic growth to the 'peripheral' euro area economies in the need of 'convergence' with the more advanced economies levels of economic development.

The chart below plots annual rates of GDP growth for the original Eurozone 12 economies, broken into two groups: the more advanced EA8 economies and the so-called Club Med or the 'peripheral' economies.

It is clear from the chart that in  growth terms, using annual rates or the averages over each decade, the Euro creation did not sustain significant enough convergence of the 'peripheral' economies of Greece, Italy, Portugal and Spain with the EA8 more advanced economies of the original euro 12 states. Worse, since the Global Financial Crisis onset, we are witnessing a massive divergence in economic activity.

To highlight the compounding effects of these annual growth rates dynamics, consider an index of real GDP levels set at 100 for 1990 levels for both the EA8 and the 'peripheral' states:

Not only the divergence is dramatic, but the euro area 'peripheral' economies have not fully recovered from the 2008-2013 crisis, with their total real GDP sitting still 3.2 percentage points below the pre-crisis peak (attained in 2007), marking 2018 as the eleventh year of the crisis for these economies.  With Italy now in a technical recession - posting two consecutive quarters of negative growth in 3Q and 4Q 2018 based on preliminary data, and that recession accelerating (from -0.1% contraction in 3Q to -0.2% drop in 4Q) we are unlikely to see any fabled 'Euro-induced convergence' between the lower income states of the so-called Euro 'periphery' and the Euro area 8 states.

13/11/2011: What do PIIGS tell us about EU's economic convergence thesis

Working with the industrial production indices today, I found it interesting to compare the PIIGS in terms of their respective industrial performance over the years. The chart below does exactly that, but first few numbers, using annual averages of monthly data for 1990-present

• Annualized production index in the Euro area had risen from 85.95 in 1990 to 105.58 in the first 6mo of 2011 - a rate of increase in the sector of 0.94% annually
• Irish industrial production over the same period rose from 31.54 to 146.43 an increase of 7.23% annually on average. We are currently at the historic peak in terms of annual averages of 146.43 slightly above 2010 level of 145.53 when our industrial activity surpassed the pre-crisis peak of 145.43 attained in 2007.
  
• Spain's industrial output index rose from 80.63 in 1990 to 85.97 in 2011 (though H1 so far) an increase of 0.29% per annum on average. Spain's industrial production peaked in 2007 at 108.79.
  
• Italy's industrial production dropped from 85.59 in 1990 to 85.48 in 2011 so far, in effect the rate of growth just below zero on average annually. Italy's industrial activity peaked in 1992 and has been declining since then.
  
• Greece's data only goes as far back as 1995 and from that base the country industrial production shrunk from 79.12 to 74.16 over the 1995-present, an annualized rate of decrease in production of 0.4%. In fact, Greek industrial output activity peaked in 2000 and has been on decline since then.
• Portugal's data is available only since 2000 and within the span of 2000-present, Portuguese industrial output index fell from 100 to 85.55 - an annualized rate of decline of 1.3%. Portuguese output maxed-out back in 2002 at less-than-impressive 102.05 or just 2.05% above 2000 level.

Now, another interesting issue is just how much was the crisis responsible for in terms of derailing any potential convergence in industrial activity between the PIIGS and the Euro area average. In all of the countries concerned, and in the Euro area 17 aggregate data, the crisis is marked by the contraction of industrial activity in 2008. Re-based to 2007=1000, data shows that:

• EU 17 remains at 93.40% of 2007 operating levels
• Ireland has exceeded 2007 peak production levels by 0.69% in H1 2011
• Greece remains at 25.35% below peak 2007 capacity and the situation is worsening
  
• Spain has seen a slight improvement on 2010 levels in H1 2011, but is still suffering a 21% decline in industrial capacity relative to pre-crisis peak
• Italy's industrial output recovered only slightly off the cyclical low, reaching the average of 84.33 in H1 2011, some 15.67% below pre-crisis levels
• Portugal's industrial activity fell in 2008, and 2009, rebounded slightly in 2010 and is now falling again. As of the end of H1 2011, industrial output index stood at 11.3% below the pre-crisis levels.
  

So overall, the data suggests that despite extremely anemic growth in the Euro area in terms of industrial production since 1990, no PIIGS country other than Ireland was on convergence path to the Euro area levels of activity. The gap in industrial performance between the countries and Euro area has grown in Greece, Italy and Portugal, and failed to converge in Spain (where growth rate was more than 3 times slower than in the Euro area).

Ireland stands alone as the economy where the much hyped convergence thesis (one of justifications for the Euro area and indeed the EU overall existence) holds. Irony has it, in Ireland this convergence was achieved, of course, almost exclusively due to MNCs. So the EU can say thank you to the US, UK, some EU and ROW investments for proving the convergence thesis in just one out of 5 examined economies.