Eurozone moving to a sustainable path - claims think-tank
by Holger Schmieding
16 November 2011
The single currency area could emerge as a much more balanced and dynamic region, if leaders manage to hold their nerve
Amid the worst turmoil in the history of European integration, many single currency member countries are adjusting rapidly. If the eurozone manages to get through the turmoil without further major accidents, it could emerge as a much more balanced and dynamic region. This is the major finding of the 2011 Euro Plus Monitor – a policy brief by Germany's Berenberg Bank and the Lisbon Council think-tank, in Brussels. It ranks all 17 eurozone members based on their overall economic health and on the speed with which they are adjusting to the challenges posed by the current market turmoil.
The study shows that the eurozone periphery is adjusting rapidly, moving from unsustainable deficiencies to a sustainable and more coherent growth model. All four countries at the euro periphery that have been disparagingly labelled "PIGS" are among the top seven in the adjustment progress ranking, and among the top six for the sub-indicator measuring external adjustment. The sizeable gains in their net exports show that countries can correct even major imbalances within the confines of monetary union. The often-heard suggestion that the crisis countries need to leave the common currency to regain their external balance is wrong.
To contain the raging financial crisis in the single currency, policy-makers had to back-up beleaguered sovereigns and wobbling banks with ever greater amounts of money and guarantees in the last few years. The widespread public perception that some eurozone countries, such as Greece, are bottomless pits and that taxpayers are being asked to throw good money after bad is wrong. Those countries most in need to rein in their excessive fiscal deficits have made serious progress since 2009, with Greece well ahead of Portugal and Spain. Whereas wage moderation has ended in some core countries such as Germany and Austria, it has taken hold in much of the euro periphery. Domestic demand has turned into the main driver of the German economy while a dramatic turnaround in net exports is cushioning the adjustment crisis in the peripheral countries, which have been forced to curtail their domestic consumption.
Alarm bells should be ringing in France. The second largest economy in the eurozone ranks only 13th in the overall health check. Even worse, the study finds hardly any adjustment progress in France in the last two to three years - in the separate adjustment ranking where France comes in at number 15. The results for France are far too mediocre for a AAA-rated country that wants to safeguard its place in the top league. In most instances, France finds itself in a class with Spain – 12th for overall health - and Italy, which is 14th, rather than with Germany in third place, the Netherlands in fourth place and Austria in eighth place. France is a potential star performer held back by reluctance to reform. Whoever wins the next election in France: chances are that the post-election administration will have no choice but to either adopt unpopular reforms immediately – or to adopt them with a vengeance a little later, after further serious slippage in the French performance relative to Germany.
Greece takes bottom place at 17th in the overall health ranking. But on the separate adjustment indicator, it comes in second after Estonia. Greece has made astonishing progress in two major and closely intertwined respects: through an exceptionally harsh fiscal squeeze, Athens has slashed its underlying fiscal deficits and curtailed its appetite for imports in a dramatic way. As a result, the net import position has become much less negative. Once the Greek economy returns to growth, Greece looks set to enjoy a huge fiscal improvement.
In the case of Greece - the overall adjustment is still in its painful first phase in which a collapse of imports, layoffs of least productive workers and severe downward pressure on wages improve the external balance and the competitive position. Estonia and – to a lesser extent Ireland – have already progressed to the second phase of adjustment in which surging exports and productivity-boosting private sector investment drive the adjustment further. The extreme experience of Greece points to an urgent need to refocus the European debate away from short-term austerity towards the long-term pro-growth reforms that are the hallmark of the Euro Plus Pact. Although the study looks only at the eurozone and does not directly compare the region with other countries, the fact that the single currency members are going through a wave of sweeping structural and fiscal reforms - and a major overhaul of its governance structure - while many other more-heavily indebted economies are not, at least, suggests that the eurozone could turn itself into a star performer among the mature economies of the world.
Holger Schmieding is chief economist at Berenberg Bank, in Germany
Amid the worst turmoil in the history of European integration, many single currency member countries are adjusting rapidly. If the eurozone manages to get through the turmoil without further major accidents, it could emerge as a much more balanced and dynamic region. This is the major finding of the 2011 Euro Plus Monitor – a policy brief by Germany's Berenberg Bank and the Lisbon Council think-tank, in Brussels. It ranks all 17 eurozone members based on their overall economic health and on the speed with which they are adjusting to the challenges posed by the current market turmoil.
The study shows that the eurozone periphery is adjusting rapidly, moving from unsustainable deficiencies to a sustainable and more coherent growth model. All four countries at the euro periphery that have been disparagingly labelled "PIGS" are among the top seven in the adjustment progress ranking, and among the top six for the sub-indicator measuring external adjustment. The sizeable gains in their net exports show that countries can correct even major imbalances within the confines of monetary union. The often-heard suggestion that the crisis countries need to leave the common currency to regain their external balance is wrong.
To contain the raging financial crisis in the single currency, policy-makers had to back-up beleaguered sovereigns and wobbling banks with ever greater amounts of money and guarantees in the last few years. The widespread public perception that some eurozone countries, such as Greece, are bottomless pits and that taxpayers are being asked to throw good money after bad is wrong. Those countries most in need to rein in their excessive fiscal deficits have made serious progress since 2009, with Greece well ahead of Portugal and Spain. Whereas wage moderation has ended in some core countries such as Germany and Austria, it has taken hold in much of the euro periphery. Domestic demand has turned into the main driver of the German economy while a dramatic turnaround in net exports is cushioning the adjustment crisis in the peripheral countries, which have been forced to curtail their domestic consumption.
Alarm bells should be ringing in France. The second largest economy in the eurozone ranks only 13th in the overall health check. Even worse, the study finds hardly any adjustment progress in France in the last two to three years - in the separate adjustment ranking where France comes in at number 15. The results for France are far too mediocre for a AAA-rated country that wants to safeguard its place in the top league. In most instances, France finds itself in a class with Spain – 12th for overall health - and Italy, which is 14th, rather than with Germany in third place, the Netherlands in fourth place and Austria in eighth place. France is a potential star performer held back by reluctance to reform. Whoever wins the next election in France: chances are that the post-election administration will have no choice but to either adopt unpopular reforms immediately – or to adopt them with a vengeance a little later, after further serious slippage in the French performance relative to Germany.
Greece takes bottom place at 17th in the overall health ranking. But on the separate adjustment indicator, it comes in second after Estonia. Greece has made astonishing progress in two major and closely intertwined respects: through an exceptionally harsh fiscal squeeze, Athens has slashed its underlying fiscal deficits and curtailed its appetite for imports in a dramatic way. As a result, the net import position has become much less negative. Once the Greek economy returns to growth, Greece looks set to enjoy a huge fiscal improvement.
In the case of Greece - the overall adjustment is still in its painful first phase in which a collapse of imports, layoffs of least productive workers and severe downward pressure on wages improve the external balance and the competitive position. Estonia and – to a lesser extent Ireland – have already progressed to the second phase of adjustment in which surging exports and productivity-boosting private sector investment drive the adjustment further. The extreme experience of Greece points to an urgent need to refocus the European debate away from short-term austerity towards the long-term pro-growth reforms that are the hallmark of the Euro Plus Pact. Although the study looks only at the eurozone and does not directly compare the region with other countries, the fact that the single currency members are going through a wave of sweeping structural and fiscal reforms - and a major overhaul of its governance structure - while many other more-heavily indebted economies are not, at least, suggests that the eurozone could turn itself into a star performer among the mature economies of the world.
Holger Schmieding is chief economist at Berenberg Bank, in Germany
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COMMENTS
Total and utter rubbish from start to finish.
You can see so clearly how the banking lobby, which has most to lose, is now so seriously rattled and can't bring itself to face the dying of a monetary system which could never work. Bankers are fair weather friends.
The eurozone technocrats such as Barroso and the bankers so manifestly failed to deliver long term European prosperity.
The current bureaucrats pushing what is clearly an outdated concept invented in the dying days of Mitterand and Kohl have never been forced to face an electorate or even answer for the ever swelling EU administrative budget.
It's time to show how the current policies only produce basket cases and force countries like Latvia, Greece and Hungary into the waiting arms of the IMF.
from Eastern Europe with much love - Tallinn Estonia
