The return of centrifugal forces?  - Trends-Trends on PC

The return of centrifugal forces? – Trends-Trends on PC

Advertisements

Advertisements

Significant economic shocks are often indicative of equally significant structural problems that were previously masked by economic growth. For example, the financial crisis had revealed major flaws in the economic solidity of certain Member States of the euro zone, but also in European construction itself. A negative spiral had then set in, between diverging economic performances and lack of confidence that investors might have in the ability of certain countries to maintain their position in the euro zone.

Significant economic shocks are often indicative of equally significant structural problems that were previously masked by economic growth. For example, the financial crisis had revealed major flaws in the economic solidity of certain Member States of the euro zone, but also in European construction itself. A negative spiral had then set in, between diverging economic performances and lack of confidence that investors might have in the ability of certain countries to maintain their position in the euro zone. After the major shock of the pandemic and with a war on European territory, it is legitimate to wonder if a new negative spiral will not take place. Indeed, we observe that the risk premia of euro-zone countries have already increased in a disorganized manner. However, the situation is not identical to that of the post-financial crisis. During the period 2009-2012, three factors cast doubt in the minds of investors. One: the very uneven ability of eurozone countries to recover from the financial crisis. Two: competitive positions that have become untenable within the framework of a monetary union. Three: very degraded public finances in some countries. Although it is probably still too early to claim victory – knowing that the current wave of inflation has yet to affect economic growth, the first factor does not seem to pose a major problem so far. The approach followed during the covid crisis and in the face of the war in Ukraine by budgetary and monetary policy has enabled most of the economies of the euro zone to quickly return to their pre-crisis level of activity. We can be more positive about the second factor. Indeed, the structural reforms imposed on the weakest countries in the context of the euro zone crisis have certainly been much decried, but they have nevertheless caused a convergence of the levels of competitiveness of the Member States. Seen from the perspective of unit labor costs, the huge gaps accumulated during the first 10 years of the euro zone’s life have given way to much more modest gaps. From the point of view of the cohesion of the euro zone (and therefore of its viability), this essential factor of the 2009-2012 crisis is rather reassuring today. The third factor is certainly the most problematic. Despite a period of good economic conditions between 2016 and 2019, the economies did not enter the covid crisis with the same solidity of their public finances. In particular, the situation of Spain, France, Belgium and Italy was already delicate. Since then, a generalized deterioration in budget balances and debt ratios has been observed due to the covid crisis. There is therefore a significant risk. In conclusion, we certainly cannot say that all the indicators are red for one or the other country. But it is essential that the centrifugal forces that almost sounded the end of the euro zone in 2012 do not reactivate, in particular through public finances that are too divergent and too deteriorated. Under no circumstances can the eurozone afford another existential crisis.

.

Leave a Comment

Your email address will not be published.