The new year has brought greater optimism in relation to the global economic outlook, with a number of international economic organizations revising up their growth forecasts or indicating that such a move is imminent. Time will tell whether the more upbeat mood is warranted ( the last few years have seen initial forecasts subsequently revised down) and it is noticeable that the ECB remains very cautious on prospects for the euro area, pointing to downside risks, although the Bank is in line with the consensus in expecting a modest upturn, with growth of 1.1% forecast for this year and 1.5% in 2015, following a 0.4% contraction in 2013 and a 0.6% fall the previous year. Those figures refer to the euro area as a whole, of course, and are a weighted average of the constituent countries, and as such can hide significant variations across the zone.
Indeed, the divergence in relative economic performance since the inception of the euro in 1999 is extraordinary. Eleven countries adopted the single currency at that time (the total has now risen to eighteen following Latvia’s entry at the turn of the year) and some of that initial group has prospered while others have stagnated, as measured by real GDP per capita. According to the IMF’s data on the latter , Finland has been the best performer over that period, with real income per head rising by 20%, marginally outstripping Germany (19.4%) . Austria is in third position, at 18%, followed by Ireland in fourth, with a cumulative gain of 17.6% despite a sharp decline since 2007. These figures are better than that achieved by the major advanced economies over the same period, led by the UK at over 16% followed by the US around 15%,
The figures cover a fourteen year period and so even the strongest performance, such as that of Germany, translates into annual average growth in GDP per head of 1.25% with the majority of the original eleven euro members not achieving 1% per annum. France is notable in that regard, with average growth per head of only 0.6% and a cumulative increase of just 8.7%, putting it in eighth position. That is only marginally better than the that of Spain, which is often portrayed as a chronically poor performer. Portugal is viewed through a similar lens but the data is still surprising, showing zero growth in Portuguese real income per head since 1999. Yet that dismal statistic is dwarfed by the figures for Italy, as real GDP per capita is actually 3.5% lower now than it was at the birth of the single currency.
Economic growth in the medium to long run is the product of growth in the labour force and the capital stock alongside technological progress so this pronounced divergence in performance could be put down to respective differences in these ‘real’ factors and not to the single currency per se- hence the emphasis from the ECB and the European Commission on ‘structural’ reforms in the euro area, which one takes to mean measures to boost the supply side of the economy and potential growth. Yet it is also undeniable that some countries have found it very difficult to cope within a monetary union dominated by a super-efficient industrial powerhouse and it is remarkable that the electorates in those economies have apparently learned to live with that stagnation.