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New Study Finds End of the Crisis Is Within Reach for the Eurozone

  • Reform Countries Are No Longer Living Beyond Their Means
  • Rebalancing within the Eurozone Is Progressing Rapidly
  • German Trade Surplus with the Eurozone Is Falling Fast
  • France Drags its Feet; It Is Becoming ‘Sick Man of Europe’ 
  • Some Core European Countries Are Becoming Complacent

(BRUSSELS, Belgium – 03 December 2013) – If the eurozone and its 17 members stay the course, the systemic crisis that has rocked Europe since 2010 could be largely over by mid-2014. This is the key finding of The 2013 Euro Plus Monitor, the authoritative competitiveness ranking released today by Berenberg and the Lisbon Council, a Brussels-based think tank.

Copies of The 2013 Euro Plus Monitor: From Pain to Gain can be downloaded on the Lisbon Council website at and the Berenberg website at

Says Holger Schmieding, chief economist of Berenberg and a principal author of the study: “Most European countries are doing their homework. If they stay the course of reform, 2014 could turn out to be a good year for Europe. The reforms have gone deeper and the adjustment has progressed further than many people realize. The reforms are setting the ground for a prolonged period of recovery. The speed of convergence taking place within the eurozone is amazing. Its key members are moving closer towards a period of more balanced growth, with significantly less internal stress.’ 

The 2013 Euro Plus Monitor ranks the 17 eurozone members (plus Poland, Sweden and the United Kingdom) on a host of key criteria. First and foremost, it measures the speed with which countries are adjusting to the challenges posed by the financial and economic crisis. But it also looks at long-term fundamental economic health. The study was formally launched in Brussels at The 2013 Euro Summit in the presence of Olli Rehn, vice-president of the European Commission and commissioner for economic and monetary affairs and the euro.

The 2013 Euro Plus Monitor is the third annual study of its kind. This year, the main conclusions are:

1. The eurozone has advanced further on the reform and adjustment track. Having emerged from a wrenching adjustment recession in spring 2013, the region is now close to the point where it can leave behind the worst of the pain and start to enjoy the gains of reform instead. To really progress to that stage, though, policymakers need to stay the course. Countries need to continue their reforms, the German Constitutional Court needs to allow the European Central Bank to do its job, and banking issues at the euro periphery need to be addressed decisively.

2. As a result of continuing rapid adjustment at the euro periphery and some progress at the core, the eurozone as a whole is turning into a more balanced and potentially more dynamic economy. Almost all countries in need of adjustment – the ones with low rankings in the Fundamental Health Indicator – have slashed their underlying fiscal deficits and improved their external competitiveness at an impressive speed, as shown by their higher rankings in the Adjustment Progress Indicator

3. The four eurozone countries that had been granted external assistance by early 2013 – Greece, Ireland, Spain and Portugal – have strengthened their adjustment efforts further over the last 12 months. As a result, they now take the top four places in the Adjustment Progress Indicator ranking. Greece ranks No. 1 on adjustment progress, as it did last year. Ireland keeps the No. 2 slot. Spain advances to No. 3, up from No. 5 last year; Portugal stays in the No. 4 position. In other words, the countries that need to shape up fast have done so under the pressure of the crisis. The results reveal no trace of a “moral hazard,” that is, of a hypothetical risk that outside support could blunt the readiness to adjust. 

4. The award for the most impressive rise in the adjustment progress ranking goes to Cyprus. Having only come under troika scrutiny in the spring of 2013, Cyprus has moved up faster than any other country in the sample to the No. 7 position, up from No. 10 in 2012 and No. 13 in 2011. If Cyprus and its creditors stay the course, the small and open island blessed with a British legacy of a comparatively flexible labour market could be on the verge of a Baltic style post-crisis rebound one year from now.

5. Italy, at No. 9 on adjustment progress, down from No. 8 last year, continues to reform itself at a rate that is well above average. But relative to the five countries that have been under troika supervision, its progress remains patchy. On the positive side, Italy has improved its external balance, increased its underlying primary fiscal surplus and delivered some useful structural reforms. On the negative side, unit labour costs are still increasing as an inflexible labour market prevents an adequate response of wages to rising unemployment. In addition, the rise in the debt-to-gross domestic product ratio caused by an unexpectedly deep recession has added to the need for some further long-term fiscal consolidation.

6. Spain, at No. 3 on adjustment progress, is adapting particularly well. Helped by strong gains in exports and subdued imports, it has shifted its external balance to an estimated net export surplus of 2.4% of GDP in 2Q 2013, up from a deficit of more than 10% of GDP in 2008. It has also reformed its labour market and slashed its unit labour costs, partly through the relentless shedding of its least productive workers, especially in the construction sector. But despite a series of harsh austerity programmes, Spain’s fiscal position remains challenging. The key for Spain should be a streamlining of its multi-layered administration rather than further cuts in current government spending. Once Spain restores trust in its banking sector, ideally with further bold actions ahead of the ECB capital adequacy review and the stress tests in 2014, it could be a candidate for a rapid rather than just a mediocre pace of rebound from the adjustment recession that finally ended in mid-2013.

7. Many eurozone members are going through a wave of sweeping structural and fiscal reforms while the region as a whole is strengthening its governance structure. At the same time, other even more heavily indebted major economies such as the US and Japan are not. If the eurozone stays on the reform path, and if reform laggards such as France finally join in, the eurozone could eventually emerge from the crisis as one the most dynamic of the major Western economies. 

8. In The 2012 Euro Plus Monitor, we argued that “in the absence of additional policy mistakes, the euro crisis could thus fade somewhat in 2013.” This has happened. The impressive adjustment progress of key member countries and the safety net provided by the ECB in August 2012 have boosted confidence. As a result, the eurozone returned to modest growth in the spring of 2013. The on-going progress in major parts of the eurozone can underpin a gradually strengthening recovery in 2014.

9. However, the situation remains fragile. To strengthen the still-hesitant cyclical rebound, the eurozone needs to do more, including (but not limited to) the following: 1) The credit crunch in parts of the euro periphery has turned into a serious obstacle to growth. Unfortunately, discussion about a banking union has retarded progress on cleaning up bank balance sheets. Instead of tackling the task decisively at the national level, and preparing to ask for troika support if capital shortfalls go beyond the means of the national government, some countries have let doubts about their banks fester for too long. They ought to act now, ideally ahead of the 2014 asset-quality review and stress tests. 2) The policy focus needs to shift decisively away from extra austerity to pro-growth structural reforms. For example, the French fiscal problems are a mere reflection of the fact that, because of its excessive labour market regulations and its equally excessive tax burden, France is not utilising its potential well. To improve its fiscal outlook, France urgently needs supply-side reforms, not a compression of demand through even higher taxes.

10. The fiscal results drive home one fundamental point: austerity is a potent medicine. It has to be applied in the right dose. A lack of the necessary medicine can kill a patient. But so can an overdose. As a general rule, we would stipulate that no country should tighten its fiscal policy, or be asked to do so, by more than 2% of its annual GDP in any year, except if the country had relaxed its fiscal stance in the previous year by more than 1% of its GDP.

11. Under adverse cyclical circumstances, the eurozone as a whole has further improved its overall health during the last year, lifting its aggregate score on a scale of 0 to 10 to 5.8, up from 5.5 last year, in the Fundamental Health Indicator. After years of painful adjustment, the euro crisis countries now reap the strongest improvements in their long-term fundamental health. The score for Greece, for example, surges to 4.5, up a full point from 2012. Ireland advances to 5.3, up 0.6 points. Portugal rises to 4.4, up 0.5 points, and Spain to 4.9, up by 0.4 points. Although these euro crisis countries still score below the euro average in terms of their fundamental health, most of them have narrowed the gap with their more healthy euro partners significantly. Europe is converging, in other words. And the result, should the process continue as it is unfolding now, will be a healthier, better-balanced economy with stronger economic fundamentals.

12. The quickening pace of adjustment at the euro periphery has raised the aggregate score for the region in the Adjustment Progress Indicator substantially to 4.2, up from 3.9. As in 2011 and 2012, the aggregate score is held back by countries such as Austria (No. 15), Finland (No. 17), Germany (No. 16) and the Netherlands (No. 13) which have only a limited need to adjust and have indeed done very little to further improve their outlook.

13. In The 2011 Euro Plus Monitor, we concluded that “alarm bells should be ringing for France,” Since then, not much has changed, and the morning bells are indeed ringing in the country Frére Jacques knows best. Today, France ranks No. 16 out of the 20 countries in the sample on overall economic health, slightly behind Spain (No. 15) and just ahead of Greece (No. 17) and Italy (No. 18). In terms of adjustment progress, France finds itself at No. 14, well behind Italy (No. 9) and far behind Spain (No. 3). France remains the only major European economy which is beset by serious health problems and has not yet done much about it. To be fair, France has modestly improved its fundamental health score (at 4.7, up from 4.5 in 2012) and its adjustment progress score (at 3.3, up slightly from 3.2 in 2012). The modest labour market reform of early 2013 was an encouraging start. But French progress remains well below the eurozone average and falls far short of what France needs. France still has one of the most bloated shares of public spending in GDP of the 20 countries in this survey and suffers from a pronounced lack of competitiveness.

14. Germany continues to shine. In terms of fundamental health, it has even moved up one notch to the No. 2 position, behind Estonia at No. 1, and swapping places with Luxembourg, now at No. 3. Its adjustment effort, although marginally improved to the No. 16 position (up from No. 18 last year), remains very timid, though. Germany continues to reap the rewards of its post-2003 “Agenda 2010” reforms but is doing very little to strengthen its position further. Unfortunately, the new government looks set to roll back some of the labour market reforms which had underpinned Germany’s revival from the sick man of Europe (1993-2005) to the continent’s growth engine.

15. Judging by the tone of its domestic debate, the United Kingdom sees itself as a place apart, different and aloof from the crisis-stricken eurozone. The results presented in The Euro Plus Monitor do not back up this view. Instead, hardly any other country in the survey has overall results that are closer to the eurozone average than the non-euro UK. In terms of fundamental economic health, the UK scores 5.3, somewhat below the eurozone average of 5.8. In terms of fiscal sustainability, the UK with a score of 4.7 still faces much bigger challenges than the eurozone average with a 6.2 score. While its macroeconomics are highly questionable, Britain gets top marks for its microeconomics, notably for its growth-friendly rules in product, services and labour markets. As befits a country with above-average aggregate health problems, the UK earns a good score for its current adjustment efforts of 4.6, somewhat above the eurozone average of 4.2. Thanks largely to wage restraint and some modest fiscal correction, the UK has moved in the adjustment ranking to No. 10, up from No. 12 last year.

16. Sweden still comes across as one of the strongest economies in Europe, and is in many respects quite similar to Germany. In terms of fundamental health, Sweden ranks No. 6, somewhat behind Germany (No. 2) and just below the Netherlands (No. 5). But recent International Monetary Fund data show that Sweden, having failed to take back the 2009-2011 fiscal stimulus, now has a need to tighten fiscal policy modestly, which it did not have before. With some loss in reform momentum and export dynamics, Sweden has fallen to the bottom of the adjustment progress league to No. 20, down from No. 13 last year, while Germany has moved in the adjustment ranking to No. 16, up from No. 18 last year. As a fundamentally healthy economy, Sweden can easily afford to take a break from the overall adjustment trend across Europe. But the fact that Sweden’s position on fundamental health is no longer quite as stellar as it was before should serve as a warning: success can breed complacency. The pause in adjustment and reform efforts should not last too long.

17. All in all, Poland continues to do well, although slightly less so than last year. It still excels as one of the few countries with scores well above average for both its fundamental health and its recent adjustment progress. Within the sample of 20 countries, Poland takes the No. 8 rank on both the Adjustment Progress Indicator (down from No. 7 in 2012) and on the Fundamental Health Indicator (down from No. 6 last year).

18. The 2013 Euro Plus Monitor shows that external imbalances are diminishing and that wage pressures are converging rapidly within the eurozone. As part and parcel of this adjustment progress, the euro crisis countries have managed to turn their erstwhile major current account deficits into a small surplus. Seen from this angle, Greece, Ireland, Italy, Portugal and Spain are no longer living beyond their means. Real unit labour costs are falling sharply in Greece, Ireland, Portugal and Spain. Conversely, wage moderation has ended in Germany. More than anything else, this shows that serious structural adjustments can happen – and are happening – within the confines of the monetary union. This result, which we had already emphasized in the 2011 and 2012 editions of The Euro Plus Monitor, is seen even more clearly in the 2013 report. Although the euro and its governance structure still need to be further improved, they provide a framework in which countries can successfully reform themselves.

19. Germany has come in for a heavy dose of criticism over its large current account surplus. In a special case study on “The German Surplus,” The Euro Plus Monitor focuses on the causes of the German surplus and analyses the recommendations to deal with it. Proposals to further deregulate the German services sector make sense, but would probably not have a huge impact on the country’s external balance. Other proposals boil down to the idea that Germany should become more like France, increasing its labour costs and raising its public spending. But would Europe really be better off if Germany were to turn itself from a growth engine into an ailing economy like France? We prefer to let the laws of supply and demand sort this out, allowing markets to run their course and providing the necessary correction, as is already happening. As the euro crisis fades, stronger business and consumer confidence in Germany look set to raise domestic investment and consumer spending. Over time, this will bring the gap between savings and investment back to a level that is normal for a country with an ageing population. That process has started already.

About the principal authors:
Dr Holger Schmieding
 is chief economist of Berenberg. Previously, Dr Schmieding was an economist at the International Monetary Fund, head of research on Central and Eastern Europe at the Kiel Institute of World Economics and chief economist Europe at Bank of America-Merrill Lynch.

Dr Christian Schulz is senior economist at Berenberg. Previously, Dr Schulz worked as an economist at the European Central Bank and as a consultant at The Boston Consulting Group.

About Berenberg:
Established in 1590, Berenberg is today one of the leading privately owned banks in Europe with four main operating divisions: private banking, investment banking, asset management and corporate banking. The Hamburg-based bank has 1,100 employees and 17 offices in Europe, America and Asia, with a strong presence in London, Zurich and Frankfurt, and is managed by personally liable partners. Its website is

About the Lisbon Council:
The Lisbon Council for Economic Competitiveness and Social Renewal asbl is a Brussels-based think tank and policy network. Established in 2003 in Belgium as a non-profit, non-partisan association, the group is dedicated to making a positive contribution through cutting-edge research and by engaging politicians and the public at large in a constructive exchange about the economic and social challenges of the 21st century. Its website is

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Paul Hofheinz
The Lisbon Council (Brussels)
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Karsten Wehmeier 
Berenberg (Hamburg)
TEL: +49 40 350 60 481

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