Growth prospects for 2014 are more positive for the Euro zone. GDP should increase by about 1%.
After 2 years of low or negative growth, this is a welcome change. This could stop the long under-performance seen since 2007 in most Euro Area countries.
However, even if 2014 brings color back to Europe, the road is still very long before considering that a new equilibrium has been reached. Especially since the situations are very heterogeneous within the Euro area. Countries have very different profiles of activity and very different dynamics
To illustrate this point I have taken the GDP per capita (at constant prices) for the Euro Area, for Germany, for France, for Italy, for Spain, for Ireland, for Portugal and for the United Kingdom. The series used are those of the AMECO database of the European Commission (see here).
The first graph shows the evolution of GDP per capita with 2007 as the baseline. The profiles are very heterogeneous. Since 2010, Germany is back to a higher level than in 2007. But this is not the case for all other countries. France is 2.5 % below the 2007 level, the Euro Area at 3.5 % and the UK at 6%. Profiles for Portugal, Italy, Ireland and Spain remain a major concern. GDP per capita fell by 6 to 12% depending on the country since 2007.
The simple question is to consider the time that will be required for each of these countries to be back to 2007 GDP per capita level. To fix ideas I took, as reference, the growth rate observed between 2000 and 2007. It is probably overkill but it is useful to define a reference trajectory.
The following table and graph below illustrates the results of these simple calculations.
Besides Germany, which has already reached the pre-crisis level of GDP per capita, there are three categories of countries. The Euro zone, France and the UK, using the growth rate of pre-crisis GDP per head, would converge to 2007 level in a little over two years. French growth is slower but the decline of its activity was lower than in the euro zone. In the UK the pre-crisis growth was very strong. This is what allows the rapid return to 2007 level.
In Spain and Ireland, the period is a little over 4 years. Strong pre-crisis growth is the major support of this rapid convergence. For Portugal and Italy it is more than 10 years and is even close to 13 years for Italy. The low pre-crisis growth is responsible for the slow convergence.
One can observe this data using the same framework as in the first chart but extending the time scale to take into account the delay.
However, these figures are misleading and probably too optimistic. Are France, the Euro Area and the UK able to find a growth pattern as fast as before the crisis? Can we also bet on the back of rapid growth in Spain and Ireland? Spontaneously it seems difficult. Discussions in Europe on the lower potential growth after the crisis reinforce this skepticism. Return to the GDP per capita level of 2007 will be much longer to implement than what is shown in these simulations. Consequently, the dynamics of the labor market will remain long fragile and balanced public finance will be longer to establish.
For Italy and Portugal the question is simple: these countries before the crisis knew very little growth. Will they have rapidly the ability to return to these pre-crisis growth rates of GDP per capita?
The slow convergence to the pre-crisis level of GDP per capita is a representation of the heterogeneity that exists today, notably in the Euro Area.
Before the crisis there was a kind of common trend within the Euro Area. This led to a kind of homogeneity of countries’ momentum. Spontaneously it seems difficult today to make this bet without creating more cooperation and coordination between member countries of the Euro zone.
The heterogeneity of the situation in Euro zone shows that, and this is the target of this little exercise, must not lead to situations of opposition from one country to another as this may cause greater social and political instability. This is what must prevail.
Mario Draghi July 26, 2012 in London indicated that the construction of Europe was primarily a political construction reflecting the will of Europeans to live together. This is the time to demonstrate this will, by developing a more integrated institutional framework.
AddendumA reader (https://twitter.com/ChrisChavagneux) of my French blog told me that the chosen period to calculate the growth rate was misleading as it was excessive in Spain, Ireland and UK. As I told him it was just to have a trajectory based on something real. He mentioned the possibility to look at the period 2010-2013. But as it is shown on the table below, there is no convergence to the 2007 GDP per capital level for the Euro Area, Spain and Italy. Negative growth rates cannot lead to a higher GDP per capita level. Convergence for France and the United Kingdom would take decades.We cannot spontaneously follow this line