Directorate General for Economic and Financial Affairs (ECFIN). European Commission
The focus section of this edition takes a look at the growth convergence experiences of euro area Member States following the introduction of the euro. Generally speaking, faster growth in relatively poorer countries has helped to narrow income gaps between EU Member States, but this convergence process is weaker for euro area members and appears to have stalled a few years after the inception of the euro. This mainly reflects a poor growth performance of catching-up countries due to disappointing productivity and TFP growth. There is also evidence of capital misallocation, with the accumulation process becoming gradually less efficient in terms of growth during the first decade of the euro. While capital investment was generally stronger in converging economies in pre-crisis years, it was concentrated in less productive industrial sectors, particularly those in services sector.
Special topics in this edition focus on a number of macrofinancial topics. One contribution looks at bank lending rates conditions across the euro area, which have become increasingly dispersed throughout the recent crisis period. While the ECB’s single monetary policy is conducted on a level playing field, available evidence suggests that macroeconomic factors influencing credit risk differ considerably across the euro area. The dispersion of bank lending rates in part reflects differences in the quality of loan portfolios, banks’ profitability or the size of capital buffers, and also depends on sovereign funding costs and the financial positions of the non-bank private sector.
A further topic examines the ongoing balance sheet adjustment processes in the non-financial sector of the euro area. It analyses how deleveraging dynamics might be influenced by the underlying supply and demand conditions on credit markets and discusses conditions for minimising the impact of deleveraging on economic activity. It also shows how the level of economic activity itself impacts on balance sheet dynamics, as falling output slows improvement in debt-to-GDP ratios.
A final contribution shows how rises in sovereign risk premia can threaten banks’ asset positions through lower bond prices and thereby reduce the supply of credit to the real economy. For highly indebted countries in the euro area, the negative output effects of higher sovereign risk premia and expectations of sovereign default can exceed those of fiscal consolidation. This implies that pursuing credible long-term consolidation from the outset could be preferable from a short-term growth point of view than undertaking no consolidation.