The Bank of Korea: "COVID-19 Widens Economic Disparities in the Euro Area... Doubts on the Sustainability of the Single Currency"

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] An analysis has emerged that the gap within the Eurozone is widening further due to the spread of the novel coronavirus infection (COVID-19). Since the European financial crisis, economic conditions among countries within the region have become differentiated, raising ongoing questions about the sustainability and effectiveness of the Euro single currency area.

On the 10th, the Bank of Korea evaluated in its 'Overseas Economic Focus' that the economic power gap in the real sector between Southern and Northern Europe is expanding due to the COVID-19 situation. This is attributed to differences in the extent of COVID-19 spread and the differing economic and social conditions between the two regions.

Examining key economic indicators of Southern and Northern Europe, major real variables showed an increased gap during the COVID-19 crisis. Between 2019 and 2021, growth rates of Southern European countries such as Italy (-3.6%) and Spain (-3.1%) significantly lagged behind those of Northern European countries like Germany (-1.0%) and Austria (-0.8%), and the standard deviation of growth rates among countries more than doubled compared to 2019. However, some nominal variables such as long-term interest rates and real effective exchange rates showed limited regional gap expansion during COVID-19, unlike during past economic crises.

As economic power concentration within the region intensified, labor from Southern Europe moved to the superior Northern European region in terms of wage levels and employment opportunities. Consequently, the growth potential of Southern European countries deteriorated. Furthermore, as the economic structure became entrenched between the core (Northern Europe) and periphery (Southern Europe), political support for the Euro and the European Union (EU) weakened in Southern Europe, increasing conflicts. Additionally, the Eurozone economy contracted more severely due to the impact of COVID-19, further widening the economic power gap.

Southern Europe, with a relatively larger share of the service sector, experienced a greater economic contraction, and inadequate business infrastructure led to more severe restrictions on economic activities due to expanded quarantine measures. Moreover, Southern Europe's limited fiscal capacity and the low effectiveness of monetary and fiscal policies in stimulating the economy also contributed to the widening gap between Southern and Northern Europe caused by the pandemic.

In Europe, COVID-19 first spread in Italy and transmitted rapidly, leading to strong containment measures centered in Southern Europe, which caused a relatively large contraction in the real economy. In particular, Italy was vulnerable due to a high proportion of self-employed workers, and Spain due to a high proportion of temporary contract workers. Based on 2019 data, the proportion of self-employed workers was 9% in Germany, 11% in France, 20% in Italy, and 15% in Spain, while the proportion of temporary contract workers was 12% in Germany, 16% in France, 17% in Italy, and 26% in Spain.

The Bank of Korea pointed out, "Despite the widening economic gap between regions, the Euro single currency system is expected to continue, but economic power concentration and the resulting accumulation of mutual dissatisfaction between Southern and Northern Europe remain challenges to overcome."

It added, "To strengthen cohesion in the Eurozone, the need for fiscal integration following monetary integration has been raised, and some achievements such as the launch of the economic recovery fund have been made. However, resolving conflicts of interest among countries and moving toward complete economic integration will require significant effort and time."

This content was produced with the assistance of AI translation services.