The European Central Bank said on Wednesday that the euro zone’s founding members had diverged economically, a “disappointing” outcome that goes against the premise that a common currency would let laggards slowly catch up.
Central European countries have made significant gains but some early adopters of the euro have clung on to their poor institutional frameworks, leaving them vulnerable to shocks, the ECB said.
“Progress towards real convergence among the 12 countries that formed the euro area in its initial years has been disappointing,” the ECB said.
Several euro zone countries, including Ireland, Portugal, Cyprus and Greece received international bailouts since the start of Europe’s debt crisis and Athens came close to being forced out of the currency earlier this month, plunging the euro into an existential crisis.
“There is some evidence of divergence among the early adopters of the euro, given that over 15 years a number of relatively low-income countries have maintained (Spain and Portugal) or even increased (Greece) their income gaps with respect to the average,” the ECB said in an economic bulletin.
“Moreover, Italy, initially a higher-income country, recorded the worst performance, suggesting substantial divergence from the high-income group,” it added.
The ECB argued that the first adopters stopped reform efforts early so their economies could not support productivity growth while the lack of effective competition contributed to a misallocation of capital.
In addition, the sharp drop in real interest rates favoured exuberant credit growth, pushing up demand and entrenching misguided expectations about future incomes.
Meanwhile, late jointers Estonia, Latvia, Lithuania and Slovakia have recorded the highest degree of convergence among the EU countries, the ECB added.
Though not a founding member of the currency union, Greece was included in 2001 and was among the 12 nations that started using the euro banknotes in 2002.