European Economic Convergence Accelerated in 2016
In 2016, the Eurozone economy proved resilient to populist shocks (the pro‑Brexit vote, the rejection of reforms in Italy) and terrorist attacks, as well as to the challenges facing the banking sector.
It is fair to say the region’s recovery firmed up this year, driven by the policy mix under the New European Economic Governance, characterized by:
- an intensification of monetary easing by the European Central Bank, which pushed financing costs down to record lows, with positive implications for corporate investment and household consumption;
- continued fiscal consolidation (the budget deficit as a share of GDP fell towards its lowest level since 2007), with a positive impact on private‑sector confidence (which strengthened to its highest since 2011).
These factors also contributed to a stronger convergence of business cycles among Eurozone member countries this year.
At the same time, 2016 also saw continued real economic convergence of the Eurozone towards the United States (as the chart below shows): the potential GDP growth differential between the two economic blocs returned in 2016 to its pre‑Great Recession low.
This was also supported by firmer potential growth in the United States ahead of the Presidential elections.
We can conclude that the Eurozone is reaping the benefits of post‑crisis governance and of a lengthy process of macro‑financial adjustment, which remains very much in the minds of companies and households.
On the other hand, structural reforms in the region did not accelerate in 2016, amid intensifying populist and protectionist pressures across the continent ahead of elections in Germany and France.
In other words, Eurozone countries did not take advantage of record‑low financing costs to step up structural reforms in recent quarters.
In this context, we would note that deepening intra‑European economic convergence depends on accelerating structural reforms (in the core, and especially in the periphery of the region).
From this perspective, 2017 (an election year in Germany and France, the region’s two largest economies) can be seen as a decisive year for European economic convergence and for the future of the Eurozone/European Union.
