Time For Structural Policy

Eurozone growth is robust. 7 out of 8 countries have a manufacturing PMI way above the 50 line (Greece is just above that level). For the services PMI 4 out of 5 are in that position (Italy is lagging a bit). Convergence has increased: since the start of EMU the dispersion for GDP growth, core inflation, fiscal balance, current account balance has declined. The Great Recession did see an increased divergence in terms of unemployment and output gap but since then this has improved a lot.

There is a risk of being “blinded by the light”, of looking too much at the cyclical picture and paying insufficient attention to persistent structural differences between eurozone countries. These differences are an important issue. They imply that in the long run some countries will be able to grow faster than others, e. g. because they benefit from stronger productivity growth. Citizens in slow growth countries may feel left behind. They also imply that some countries will be less resilient to shocks than others, because they have a high public sector debt burden (which would mean little or no policy leeway to support growth in case of a recession), because private sector debt is high (which weighs on final demand responsiveness to monetary easing) or because, as is the case in Italy and Portugal, non-performing loans are still high.

As a consequence, boosting potential GDP growth and economic resilience are important objectives for structural economic policy. The current environment is supportive for such a policy. There is no longer a need for short-term fire-fighting and to the extent that some of these efforts could create some headwind in the short run, countries are now better positioned to cope with them. Finally, policies conducted in individual countries create positive externalities and make the eurozone as a whole more robust.

by William DE VIJLDER