Economic diversity

Economic structures vary across the euro area countries, causing differentials in economic performance between them.

Diversity in economic structures relates, for example, to the relative importance of different economic activities for aggregate output. The chart below shows that in 2012 the shares of different groups of activities in total economy value added differed substantially across countries.

These differences in the relative importance of activities reflect countries’ specialisation in the production of different goods and services, which is shaped by factors such as geographical location, demography, the institutional framework (including fiscal policies) and consumption patterns.

One of the main reasons for significantly different structures of value added across countries is that many domestically produced goods and services are traded among the member countries and between the euro area and the rest of the world. The increasing international specialisation and trade integration are factors contributing to the shifts in the importance of activities over time. Trade in goods and services plays an important role in all euro area countries. However, some member countries have, owing to their specialisation and geographical location, stronger dependencies on trade than others, as shown in the chart below. Depending on the trade partners and directions of trade flows, a high share of external trade in GDP tends to increase growth potential as foreign demand expands faster than domestic demand. However, it also entails a higher exposure to adverse external shocks via the trade channel.

Economic structures display limited fluctuations over the business cycle, but otherwise typically change very gradually over time. Rapid changes in these structures, such as the expansion of construction activity in some countries, can be an indication of a build-up of imbalances, which need to be subsequently unwound.

Differences in economic structures and in the speed of their adjustment lead to divergences in economic performance between member countries, as is also the case for other large currency areas such as the United States.

Looking at the dispersion of growth performance as shown in the table below, it can be seen that in the euro area 12, excluding countries which joined the euro area after 2001 (Slovenia, Cyprus, Malta, Slovakia, Estonia and Latvia), growth dispersion was lower since the introduction of the euro compared to the corresponding period of the same length before. It was also lower in both of these periods compared to the respective dispersion of real GDP growth across U.S. states. While a smaller dispersion within the euro area compared to the U.S. might be expected from the smaller number of euro area members compared to U.S. states, the less pronounced integration of labour and product markets in the euro area compared to the U.S. would have suggested the opposite result. Caveats for making such comparisons relate to the comparability of the (unharmonised) data and geographical entities. When including the recent entries to the euro area, dispersion of real GDP growth within the euro area 17 was slightly higher, also partly reflecting catching-up processes in these countries.

As regards HICP inflation developments, in the euro area 12, excluding countries which joined the euro area after 2001, inflation dispersion was much lower since the introduction of the euro compared to the corresponding period before, and of comparable size to CPI inflation dispersion between 14 US Metropolitan Statistical Areas (MSAs). When including the more recent entries to the euro area, dispersion of HICP inflation was higher in the euro area 17, partly due to convergence processes in these countries. Looking at dispersion in unit labour cost growth, again this was much lower since the start of the euro area than in the preceding period, comparable to that among U.S. states, and higher when including the recent euro area entries.

Divergences in growth, inflation and unit labour cost developments across euro area countries have overall been moderate since the start of the monetary union. However, some member states have shown persistently weaker GDP growth performance and/or stronger inflation and unit labour costs growth than others. The resulting competitiveness losses in these countries compared to their peers have also been reflected in heightened current account imbalances after the start of the monetary union, which are in the process of being corrected. To avoid large imbalances in the future, inefficiencies in economic structures and rigidities in structural adjustments need to be identified at an early stage and addressed by national policies.