Concerns over potential divergence in the eurozone are valid despite strong fiscal response at national level all over EU, and the unprecedented fiscal package adopted by the European Council. Again, the North or the “core” eurozone countries, will get out of the crisis faster and stronger, while the South or “periphery” countries remain at risk of a prolonged slump, according to two of ING’s most recognisable faces.
Economists Bert Colijn and Castren Brzeski in their article titled “Eurozone still set for divergence despite fiscal support” published on Tuesday (April 20) on ING’s THINK, argue that “EU recovery and resilience grants do seem to target the countries most in need, but are unlikely to fully prevent further divergence.”
According to the ING Vulnerability Index, which measures the risk of a weak economic recovery, the traditional North-South divide in terms of economic strength is very apparent. Ireland, Luxembourg, Finland and the Baltics have closed the gap or are very close to pre-Covid levels, while the southern eurozone economies are still around -6% or worse compared to pre-Covid levels. Meanwhile, there are good news for Eastern European eurozone countries, which have much lower GDP declines than expected.
Although most vulnerable countries are set to benefit from a larger fiscal impulse, a cold turkey withdrawal of stimulus packages is likely to lead to an increase in bankruptcies and higher unemployment, the authors argue.
“In addition, tourism is unlikely to see a full recovery by the summer. Clearly, this is more important for the peripheral economies and the ones more dependent on summer holidays than the ones dependent on winter holidays like Austria. Nevertheless, all tourism related activity is likely to remain uncertain for some time, causing extra risk of prolonged weakness” they wrote.
Of note, tourism, one of the hardest-hit economic sectors, represents 13% of Italy’s gross domestic product, 15% of Spain’s and 21% of Greece’s, according to the World Travel and Tourism Council. On top of that, many banks in Southern Europe are still wrestling with a large pile of nonperforming loans from the last financial crisis.
The European Council adopted on 11 February 2021 the regulation establishing the Recovery and Resilience Facility (RRF). The €672.5 billion facility is at the heart of the EU’s extraordinary recovery effort, Next Generation EU (NGEU): the €750 billion plan agreed by EU leaders in July 2020.The funds will help member states address the economic and social impact of the COVID-19.
In order to receive support from the Recovery and Resilience Facility, EU countries plans are asked to set out a coherent package of projects, reforms and investments in six policy areas: 1. Green transition,
2. Digital transformation 3. Smart, sustainable and inclusive growth and jobs 4. Social and territorial cohesion 5. Health and resilience 6. Policies for the next generation, including education and skills.
EU countries have until 30 April 2021, as a rule, to submit their national recovery and resilience plans setting out their reform and investment agendas until 2026.
“Despite historic efforts by European leaders to boost convergence in terms of economic recovery, it does look likely that the structurally stronger economies are moving further away from the weaker ones” Colijn and Brzeski said. And the weaker performing southern economies are at risk of falling further behind.
- Carsten Brzeski is the Global Head of Macro for ING Research. His main areas of expertise are economic and political developments in Germany and the Eurozone, including the monetary policy of the European Central Bank (ECB).
- Bert Colijn is a Senior Economist at ING. He joined the firm in July 2015 and covers the global economy with a specific focus on the eurozone. Prior to this, he worked at The Conference Board, a global think-tank, in Brussels focusing mostly on long-term economic growth.
Just as it was during the euro crisis, Europe remains divided along north-south lines. Indeed, the euro is too expensive for Southern economies. The North wants to enjoy inexpensive vacations in the South in the summer, to import cheap agricultural products from the South in the winter and export expensive Northern industrial products or services to the South all year long. Plus to lend expensive money and dominate in various ways. As the cartoon shows, poor countries feed the rich ones. Not the opposite. In simple words, industrialized countries have persuaded emerging countries not to be able to develop properly – so as not to compete with them. The Covid-19 has only worsened the conditions for weak countries, but improved the chances for the strong ones.