The primary objective of the European Central Bank is to maintain price stability. However, as a compliment to its primary objective, the Eurosystem “shall also ‘support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union’. These include inter alia ‘full employment’ and ‘balanced economic growth’”. These objectives are laid out in Articles 3 and 127 of the Treaty on the Functioning of the European Union. I wonder whether or not the objectives related to ‘balanced economic growth’ and ‘full employment’ are indeed being achieved? One could argue that they are not.
Put more simply: Nominal GDP is diverging across program and non-program countries. If this economic duress leads to early exit, I would posit that the balanced growth clause has been breached.
Click to enlarge:
The charts above illustrate the dynamics of nominal GDP (NGDP) across the largest non-program and program countries (I explicitly refer to a program country as falling under an explicit EFSF program). These charts demonstrate that unbalanced growth may already be in the works. In Q3 2011, Ireland, Greece, and Portugal were producing an average 2.2% above their minimum level of NGDP during the crisis (Greece’s last data point was in March 2011, so this number is clearly biased upward). In contrast, the largest non-program countries are producing at 6.1% above their minimum levels of NGDP during the crisis – a 3.9% differential in recovery patterns. Germany alone is producing 110.3% above its trough during the crisis. I suspect that the program country average will fall below 100 in coming quarters, as the debt deflationary cycle grabs hold. This view of the euro area is anything but “balanced”.
Balanced, according to Merriam-Webster online, takes several definitions, but essentially it’s some measure of equality in weight on two sides of a vertical axis. Let’s call the vertical axis the euro area average NGDP recovery. It’s a pretty close call because France is running just below the EA average – but compared to the minimum level of NGDP attained during the recovery through Q3 2011, 56% of the EA has recovered by a percentage less than the EA average of 6.3%, while 44% have recovered by more. I’m sure that there are many ways to define balanced growth – but in NGDP terms, this looks unbalanced.
Now, the treaty defines no explicit time frame for ’balanced growth’. If it’s a long-term objective, lets say 5-10 years, then one could argue that the forced structural reform in Ireland, Portugal, and Greece (even Spain, Italy, and France) will increase long-term potential growth, thereby not breaching the treaty.
But what if the countries are forced to exit before the structural reform starts producing positive growth in average real GDP? Chapter III of the 2004 World Economic Report highlights two important points that should be considered: (1) it’s rare for countries to tackle multiple levels of structural reform at once; and (2) it takes a long time, as in the case of New Zealand, for aggressive structural reform to pass through to the real potential growth rate. The EA is attempting many levels of reform, including financial, labor, product, and tax. This is rare and history shows that this can take up to a decade to show results (as in New Zealand’s case).
I can only deduce that Greece, Ireland, and Portugal probably don’t have enough time and are likely going to be, if they haven’t started already, weighing the pros and cons of exit. If these countries do choose exit, it’d likely be under economic duress. Hence, the EU would have failed to target ’balanced growth’, as outlined in Article 3.
I like the way that Megan Greene (@economistmeg) put it in her response to the Irish Times query “Is austerity the best policy?”:
There is a fighting chance that Ireland can eventually grow its way out of it – but I think the time is too short for Ireland to turn it around.