Structural reforms and macro-economic policy - ETUC

etween. Notice also that the slowdown in 2001-02
was common to all four countries. Yet while growth
fully rebounded in Spain in due course, recovery was
more moderate in France and Italy, and Germany
actually failed to recover at all until 2006.
Annual percentage change
7,0
6,0
5,0
4,0
3,0
2,0
1,0
0,0
-1,0
-2,0
-3,0
Real divergence inside the euro area
Spain
Italy
France
Germany
1999 2000 2001 2002 2003 2004 2005
Source, OECD Economic outlook no. 78 (dec 05)
Note. Real total domestic demand
In line with these persistent inflation and growth
differentials, a build-up of current account imbalances
has occurred since the euro replaced national currencies
in 1999.While Germany has experienced a striking
improvement in its current account position, the other
three countries’ positions have deteriorated markedly.
Since 1999, Germany’s current account position has
improved by some five per cent of GDP. By contrast,
Italy’s, France’s and Spain’s current account positions
have deteriorated by three, four and five per cent of
GDP respectively, with the latter’s deficit forecast to
reach double-digit territory by next year.
As percentage of GDP
6,0
4,0
2,0
0,0
-2,0
-4,0
-6,0
-8,0
-10,0
Intra-euro area current positions
1999 2000 2001 2002 2003 2004 2005 2006
Source, OECD Economic outlookno. 78 (dec 06)
Spain
Italy
France
Germany
Let me quickly concede here that ‘catching up’may be
part of the story in Spain’s case, though only a minor
one in the general view 3 . How, then, can such
persistent cyclical divergences be explained? And do
they pose any threat to EMU?
Asymmetric shocks as the prime suspect
Surely ‘asymmetric shocks’ must be seen as the
prime suspect.These are shocks that do not affect all
3 Catching up is far more of an issue when it comes to the new EU members in central and eastern Europe.
currency union countries – thus by their very nature
causing divergence within the union. Asymmetric
shocks have been at the heart of optimum currency
area research right from the beginning. Optimum
currency area (OCA) theory was always regarded as
providing the right kind of framework for assessing
the chances and risks of EMU in Europe throughout
the decades of debate that accompanied this ambitious
project until its realisation and beyond. In view
of the above evidence, and in the light of OCA, one
would thus investigate the hypothesis that Germany
in particular may have been subject to a series of
adverse shocks, shocks that have had much less of a
negative impact on Germany’s EMU partners.
Before applying OCA wisdom to the divergence
phenomenon as seen in the euro area since 1999, let
me clarify three points here at the outset. First, to the
extent that the ‘global slowdown of 2001’ represented
a negative external shock to the euro area,
arguably this shock was essentially a common one,
symmetric rather than asymmetric in nature.
Whether related to this common external shock or
not, as noted above, the slowdown in domestic
demand seen in 2001-02 was common to all four
countries under investigation here too. Second, if
anything, the global recovery since 2002 has
featured asymmetry in Germany’s favour. Arguably,
Germany has been the greatest beneficiary of the
strong global growth environment since 2003. Its
export structure (capital goods) and its exposure to
fast-growing economies in central and eastern
Europe, developing Asia and among oil producers
have both worked to Germany’s advantage. Third,
focusing on the global economy and external shocks
is liable to distract from the real issue. The real issue
in the euro area concerns domestic demand, both its
persistent overall weakness and persistent divergences.The
euro area is a very large economy, second
in size and global weight only to the US. Blaming
protracted domestic demand stagnation on conditions
‘elsewhere in the world economy’ is a poor
excuse – especially when the global economy has
enjoyed a four-year boom.
In coping with asymmetric shocks, the related key
policy matter is whether any emerging cyclical
divergences are either counterbalanced or amplified
by market mechanisms, or whether deliberate
policies have to be designed with a view to stabilising
– and holding together the various parts of! –
the currency union.
PART 3: Structural reforms and the european macro-economic policy regime
/ 77