EURO-AREA INSIGHT: Fear May Spread From Italy to These Countries


EURO-AREA INSIGHT: Fear May Spread From Italy to These Countries

EURO-AREA INSIGHT: Fear May Spread From Italy to These Countries

By David Powell (Economist) and Jamie Murray (Economist)(Bloomberg Economics) —

Discontent drove Greece toward populism, now Italy is shifting to political extremes. Where else have economic conditions failed to satisfy? Cyprus, France, Lithuania, Portugal and Spain stand out, according to a Bloomberg Economics index. It’s no surprise that countries that were previously bailed out are on the list, but Lithuania may also be worth watching. Over the longer-term, France is a risk too.Countries that have lost competitiveness, experienced slow economic growth, felt the pinch of austerity and emerged indebted, jobless and bitter about the euro pose the biggest threat to the fabric of the monetary union. To summarize discontent across the bloc, Bloomberg Economics has created simple rankings of the euro area’s economies.

The factors we considered are: the change in external competitiveness since joining the monetary union; the Eurobarometer poll of citizens’ opinions of the euro in 2017; the size of the current account balance at the end of last year; the growth of real GDP per capita since becoming a member of the club; the amount of fiscal tightening since the end of 2009; the rise of youth unemployment since 2007; and the current size of the debt-to-GDP ratio.

Life Has Been Worst in Greece


Disillusionment in Italy seems understandable. Forty percent of the population thinks the euro is a bad thing for the country. Real GDP per capita has only expanded by 1.4% since the birth of the monetary union. Youth unemployment stands at 11.7%. And the debt-to-GDP ratio is a whopping 131.5%, leaving little room for maneuver under the bloc’s fiscal rules.

The euro is not to blame for all of this — a lot has to do with domestic policy settings and failure to reform. Still, general discontent seems likely to explain part of the recent shift toward populist politics, and there’s a significant risk that Italy’s new leaders could put the country on course for a departure from the single currency.

Italy Suffers From a Range of Economic Problems


Lithuania has received less attention. However, the euro is less popular there than anywhere else in the monetary union. The biggest problem, from an economic standpoint, is a loss of competitiveness. The country joined the club in 2015 and, in the two years that followed, the ECB’s competitiveness indicator deteriorated more than anywhere else in the bloc.

That didn’t prevent Lithuania from running a small current account surplus in 2017, after being in deficit in 2015 and 2016, but the IMF forecasts a move back into negative territory this year and for it to stay there for the remainder of the forecast horizon. Real GDP per capita has expanded 4.2% annually since joining the club, but that’s well below the average for the preceding 15 years of 8.3%. Fiscal tightening and a rise in youth unemployment appear to have added to the discontent, as well.

Lithuanians Dislike the Euro


With Emmanuel Macron in the Elysee Palace, France appears safe from political upheaval for the next few years. However, the country has already had a serious brush with populism and Marine Le Pen will be waiting to face the electorate again. Our index suggests her supporters will still have plenty to complain about.

The most serious economic problem for France is that the country is externally out of balance. It has a current account deficit of 1.4% of GDP. That compares with a surplus of 8% in Germany and an average for the bloc of 2.9%. The deficit has put the country’s international investment position on an unsustainable track.

France Falls Further Into Debt to Foreigners

The French are also constantly clashing with budgetary officials in Brussels. The combination of its high debt-to-GDP ratio and the bloc’s fiscal rules create serious constraints. In addition, the increase in real GDP per capita since joining the euro area has been below average. The malaise has been reflected in a greater dislike for the euro than elsewhere. None of these factors seem serious enough to push France into crisis, but together they’re probably continuing to whittle away at support for the European project in its present form.

France Faces Numerous Obstacles

Methodological Note

To construct the rankings, we calculated the countries’ z-scores for each variable. The signs were changed on some indices so that a negative number is bad for the country (a loss of competitiveness, an above-average percent of people who dislike the euro, a current-account deficit, weak GDP per capita growth, fiscal tightening, elevated youth unemployment and a high debt-to-GDP ratio). The z-scores were then summed. Importantly, a positive number doesn’t mean that life with the euro has been great, it merely means that economic conditions in those countries have been better than in those where they’ve been the worst.

Source:Bloomberg Economics


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