Europe divided: 7 charts on deep economic splits

10/6/2016

By Mehreen Khan

The eurozone is a union divided.

In its latest health check on the state of the single currency area, the Organisation for Economic Cooperation and Development has warned that integration is the only way the bloc can solve some of its most intractable social, economic and political problems, writes Mehreen Khan.

The call for reform comes as the Paris-based institution highlights the “uneven” economic performance that has marred the euro’s 19 member states.

Here’s a look at seven of the ways the eurozone has pulled in different directions since the financial crisis.

Perhaps the starkest illustration of the currency union’s division is the total size of its weakest and strongest economies nine years after the onset of the Great Recession.

As a whole, the euro-area’s total GDP only managed to exceed its pre-2007 level at the start of 2016, but as the chart above shows, Greece, Spain, and Italy, still languish below this key milestone.

Greece in particular has suffered an economic contraction eclipsing that of the US during the Great Depression, losing 28 per cent of its GDP.

Unemployment

Joblessness is the most visible social consequence of the crisis in the eurozone’s southern member states. Unemployment rates in Spain and Greece continue to linger above 20 per cent, while youth unemployment is more than double that.

This persistent jobs crisis has led ECB chief Mario Draghi to warn that economies face permanent losses in their future output and productivity (a phenomenon economists dub “hysteresis“).

Austerity

Of the three eurozone economies to need international bailouts at the height of the debt crisis in 2010 – Greece, Ireland and Portugal – the first has undergone by far the most severe fiscal consolidation of any of its peers.

The chart above shows the level of post-crisis expenditure cuts across the eurozone. At 12.2 percent, Greece’s primary balance shift has been nearly double the 7.8 per cent seen in Ireland.

Although Athens’ official creditors, particularly in the northern states, still argue that austerity is the only way back to prosperity for debtor states, Greece’s belt-tightening shows that too much medicine can hurt, rather than heal, the patient.

Investment

Growth may be tentatively returning to the euro area, but like its counterparts in the UK and the US, investment levels have barely improved despite accommodative monetary policy.

Germany is the only economy where investment levels now exceed pre-crisis levels, but even then, the performance has hardly been impressive (see chart).

The EU is aiming to remedy this chronic investment gap by setting up its much-famed “Juncker plan”, known as the Investment Plan for Europe. But as the OECD notes, as long as demand is weak, banks lumber under high levels of bad loans, and businesses are hampered by restrictive levels of corporate debt, investment is set to remain sluggish.

Exports & competitiveness

The eurozone’s weaker economies have long been told to export their way back to prosperity. But that’s a process that is easier said than done.

The chart above shows that only one former bailout nation – Ireland – has managed to successfully turn around its fortunes with a bumper export performance far outstripping its peers.

Ireland’s blistering export growth can be attributed to the substantial boost to the country’s cost competitiveness following its €90bn international rescue in 2010.

The chart below shows just how dramatically unit labour costs have fallen in the former Celtic Tiger as it has undergone a painful process of internal devaluation to slash wages and ease up labour laws.

But this process has not been helped by stronger member states, namely Germany, which has also seen a relative fall in its unit labour costs since the crisis.

Struggling to compete with the continent’s economic powerhouse, Greece (despite a reduction in unit labour costs albeit by smaller margin) has actually seen its export performance deteriorate alongside Italy.

Non-performing loans

The eurozone’s sovereign debt crisis may have abated, but problems in its banking sector remain largely unresolved.

This is best illustrated by the level of bad performing loans that still sit on the balance sheets of the continent’s lenders.

Italy’s problems are the most acute and have led the OECD to recommend the EU to set up a Europe wide asset management company to resolve the continent’s bad loan problems and allow banks to recover the highest possible value for their impaired loans

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