Growth prospects for 2014 are more positive for the Euro zone. GDP should increase by about 1%, according to Philippe Waechter, chief economist in the fund manager company Natixis Asset Management. “After 2 years of low or negative growth, this is a welcome change. This could stop the long under-performance seen since 2007 in most Euro Area countries”.
However, “even if 2014 brings color back to Europe, the road is still very long before considering that a new equilibrium has been reached”. The reason? The situations are very heterogeneous within the Euro area. Countries have very different profiles of activity and very different dynamics.
To illustrate this point he has taken the GDP per capita (at constant prices) for the Euro Area, for Germany, for France, for Italy, for Spain, for Ireland, for Portugal and for the United Kingdom. And he considers the time that will be required for each of these countries to be back to 2007 GDP per capita level.
Besides Germany, which has already reached the pre-crisis level of GDP per capita, there are three categories of countries. The Euro zone, France and the UK, using the growth rate of pre-crisis GDP per head, would converge to 2007 level in a little over two years. French growth is slower but the decline of its activity was lower than in the euro zone. In the UK the pre-crisis growth was very strong. This is what allows the rapid return to 2007 level.
In Spain and Ireland, the period is a little over 4 years. Strong pre-crisis growth is the major support of this rapid convergence. For Portugal and Italy it is more than 10 years and is even close to 13 years for Italy. The low pre-crisis growth is responsible for the slow convergence.
However, these figures are misleading and probably too optimistic. Are France, the Euro Area and the UK able to find a growth pattern as fast as before the crisis? Can we also bet on the back of rapid growth in Spain and Ireland?, he wonders. “Spontaneously it seems difficult”, says the economist. “Discussions in Europe on the lower potential growth after the crisis reinforce this skepticism. Return to the GDP per capita level of 2007 will be much longer to implement than what is shown in these simulations. Consequently, the dynamics of the labor market will remain long fragile and balanced public finance will be longer to establish. For Italy and Portugal the question is simple: these countries before the crisis knew very little growth. Will they have rapidly the ability to return to these pre-crisis growth rates of GDP per capita?”
The slow convergence to the pre-crisis level of GDP per capita is a representation of the heterogeneity that exists today, notably in the Euro Area, says. “Before the crisis there was a kind of common trend within the Euro Area. This led to a kind of homogeneity of countries’ momentum. Spontaneously it seems difficult today to make this bet without creating more cooperation and coordination between member countries of the Euro zone”.
The heterogeneity of the situation in Euro zone shows that, and this is the target of this little exercise, must not lead to situations of opposition from one country to another as this may cause greater social and political instability. “This is what must prevail. Mario Draghi July 26, 2012 in London indicated that the construction of Europe was primarily a political construction reflecting the will of Europeans to live together. This is the time to demonstrate this will, by developing a more integrated institutional framework”.