- The Eurozone has seen cyclical convergence in recent years with a reduced dispersion across of variables like fiscal balance, unemployment, inflation
- Structural differences remain sizeable and influence long-term growth as well as the resilience to shocks The eight following charts illustrate the points made in this week’s editorial. With the exception of the chart on non-performing loans, the charts show the evolution of the cross-sectional standard deviation for different economic variables. It is useful to look at the dynamics but also at the level: the standard deviation of unemployment has declined in recent years but, looking at the scale, remains at a high level. The dispersion in terms of productivity (output per hour) has fluctuated quite a bit but the range has been narrow. On average however, the standard deviation is high.
The picture which emerges is quite mixed. On the positive side one should note
1. The declining standard deviation of the fiscal balance, which moreover converges to a low level
2. The decline in the standard deviation of the output gap
3. The declining standard deviation of core inflation On a less positive or even negative note we have
1. The high dispersion in the unemployment rate.
2. Moreover the dispersion remains well above the low point before the Great Recession
3. The jump in the standard deviation of public sector debt, with no subsequent decline
4. The jump in the standard deviation of private sector debt, with no subsequent decline
5. Labour productivity fluctuates a lot and the standard deviation remains high
6. In several countries the banking sector still has a high level of non-performing loans Sizeable structural differences imply that countries will grow at different speeds which may complicate the conduct of monetary policy, which of course applies to the Eurozone as a whole. In addition, they also reflect differences in terms of resilience to economic shocks, fiscal policy leeway and responsiveness to monetary policy.
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by William DE VIJLDER