One of the original promises of the Euro project was that it would lead to economic convergence amongst the member nations. Here are the words of the then ECB President Wim Duisenberg from Prince’s favourite year 1999.
I believe that the euro need not be a factor of division of Europe but rather will have the potential of becoming an instrument for accelerating its integration
I guess we all may be forgiven for wondering if he left the letters dis out in front of the word integration! But wait there was more.
The euro, in particular, will be a strong and stable currency that will foster further economic and financial integration among member countries, thereby completing the internal market.
How did this “integration” work out for Greece,Ireland and Spain in particular? We see a group of countries whose economies had a housing boom and then bust because the Euro area interest-rate was in essence set for Germany and not them. Sadly Portugal never had a boom at all but in economic terms did then manage a bust.
Oh and as it is Friday let me provide a little pre weekend humour.
From the start of Stage Three, all EU countries – both those participating and those not participating in the euro area – have to avoid excessive deficits.
How can it be avoided that a country not entering the euro area from the start is “left out in the cold”,
Today’s reality is very different
However readers of this blog will be aware that in fact we have seen increasing divergence according to the official data. One of the divergences I have discussed several times before is one which is right at the heart of the Euro area project which is the Franco-German axis. Let me show you todays economic growth or GDP data for these two countries released this morning.
The German economy gained momentum towards the end of 2014. In the fourth quarter of 2014, the gross domestic product (GDP) rose 0.7% on the third quarter of 2014 after adjustment for price, seasonal and calendar variations.
It was a top and tailed year for Germany which had good growth at each end and flatlined in the middle leading to the overall result shown below.
The Federal Statistical Office (Destatis) also reports that this has led to a +1.6% increase (also when calendar-adjusted) for the whole year of 2014, which is even slightly higher than the provisional result released in January.
So solid if not spectacular so now let us examine a matching set of data for France.
In Q4 2014, GDP in volume terms increased by 0.1%. Over the year, GDP rose by 0.4% as in 2013.
Intriguingly the French statistics office takes the time to tell us this.
GDP growth in 2014 Q3 is still estimated at +0.3%.
It is almost as if they feel that such a number needs continual re-affirming. Also there is another troubling feature of these numbers for France and it comes from the area of investment which is recorded as CFCF.
Over the year, GFCF stepped back: –1.6% after –0.8% (in 2013).
So we see another year where Germany has outperformed France and if you think that this is insignificant then consider that compound interest even at a rate of 1% or so builds up over time and we have had several years of this already. The credit crunch pattern is that Germany contracted by more than France initially but the rebounded much more strongly but after a weak patch for both Germany looks to be pulling away, especially if we allow for the fact that the recent French growth has been based on government spending.
Putting that another way Germany is pretty much running a balanced budget whereas France has a fiscal deficit which was 4.5% of GDP at the end of the third quarter of 2014. That is one and a half times the 3% of the Stability and Growth Pact which Wim Duisenberg was boasting about in the speech quoted from above.
What about the divergence between Italy and Spain?
Analysing economic growth in Italy has become sadly easy in these times as there has not been any! Actually as today’s data hints at the overall picture is regularly worse than that as we regularly see falls.
In the fourth quarter of 2014 the seasonally and calendar adjusted, chained volume measure of Gross domestic product (GDP) remained unchanged with respect to the third quarter of 2014 and decreased by 0.3 percent in comparison with the fourth quarter of 2013.
By contrast Spain has rebounded quite strongly from its housing bust which caused an economic slump. It is much more prompt with such data and released this at the end of January.
The Gross Domestic Product (GDP) generated by the Spanish economy registered a 0.7% variation in the fourth quarter of 2014, as compared to the previous quarter.
The annual variation of the GDP in the fourth quarter 2014 was 2.0%, against 1.6% in the third quarter.
Since the beginning of 2013 the quarterly growth pattern has shown steady improvement in Spain. By contrast Italy has not had a single quarter of actual growth with its best effort being that of stagnation. Indeed the last fourteen quarterly growth reports from Italy have shown stagnation or worse. A negative rate of annual economic growth has been recorded for the last thirteen quarters. All this comes on the back of a poor pre credit crunch performance from Italy.
If we move to the government finances statistics that the Euro area so loves then Eurostat’s new graphics tell us that the national debt to GDP ratio was 128% for Italy and the end of 2013 and for Spain it was 92%. If we factor in that the Italian economy has shrunk consistently since then and its government has run a fiscal deficit I will leave you to draw your own conclusions. Whereas Spain is recording some growth creating a different dynamic.
There is a cautionary note here which concerns how inflation and in this instance disinflation is being recorded by the official deflators. Many countries have what might be called issues here but the Spanish series has been how can I put it inconsistent and erratic in my opinion.
This is of course the clearest case of economic divergence as it plunged into an economic depression where economic output and wages collapsed. The official story is one of Grecovery so how is it going?
Available seasonally adjusted data indicate that in the 4th quarter of 2014 the Gross Domestic Product (GDP) in volume terms decreased by 0.2% in comparison with the 3rd quarter of 2014, while it increased by 1.7% in comparison with the 4th quarter of 2013.
So it contracted again! Against that it has expanded over the past year. As I have explained on twitter today if you consider the size of the fall then this is not much of a bounce-back is it? Especially if we allow for the recent quarterly decline.
The Euro area overall has produced quarterly growth figures of 0.3% and annual ones of 0.9%. So another period passes where those nations “in the cold” as Wim Duisenberg boasted have outperformed those in the warm of his promises. So whilst I welcome any growth as it is badly needed we see that there is in fact extraordinary divergence underlying it which is getting worse on so many levels. I note that the physicist Gemma Godfrey has labelled it “Splitting at the core” but it is splitting pretty much everywhere in my view.
So there you have it. My financial lexicon for these times will define convergence as a splitting apart.
As I do not subscribe I cannot read the underlying article but it is tweeting this fairly regularly under the @EconEconomics label.
Has the Bank of England chosen the wrong target for inflation in Britain?
Whereas the 2012 paper on inflation targeting on the Bank of England website tells us this.
in three cases, Norway, South Africa and the United Kingdom, the target is set by the government