Real divergences and the eurozone crisis

Abstract

The first 15 years of European Monetary Union (EMU) have seen growing structural imbalances between member states without offsetting gains in productivity and economic growth. Economic tensions within the Eurozone have been building since its inception, and have become acute during the current crisis. It has created a dualism in the euro zone, with northern countries recovering, albeit slowly, from the crisis, increasingly diverging from southern countries that are embroiled in sovereign-debt crises and with weak prospects of growth, even in the medium term. Divergence in competitiveness, in current accounts and in private sector debts has led to excessive public sector debt and deficits in peripheral Southern countries. The Eurozone has imposed an asymmetric policy response to these divergences, with the burden of adjustment falling almost exclusively on the weaker economies of the South. These peripheral economies are required to seek a real depreciation with respect to the North through a combination of wage reductions and fiscal retrenchment. But, will the internal devaluation contribute to a further increase of real divergences or to restore competitiveness in the peripheral countries? This is the primarily question of this proposal. It is aimed to analyze the euro crisis, focusing on its economic roots and the interactions between the crisis and the observed real divergences. The results suggest that there are notable differences across countries and the whole nation in terms of capital intensity and total factor productivity. Furthermore, the economic reforms don’t have been successful in driving long-run growth. So, countries need further reforms in order to reach convergence.