Business cycles in eurozone countries have converged

FRANKFURT (Reuters) – Business cycles in different eurozone countries have converged over the past 15 years, but significant variations remain in underlying growth rates, new research from the European Central Bank shows. Different growth rates across the 12-nation currency bloc are a problem for the ECB because they make it harder to set a single interest rate that is appropriate for all countries. The research showed that overall growth rates had converged since the 1990s, and were similar to the differences among the 50 US states. But disparities persist in eurozone countries’ average growth over the economic cycle. «Since the beginning of the 1990s, the dispersion of real GDP growth rates across the euro area countries has largely reflected lasting trend growth differences, and less so cyclical differences,» ECB researchers said in an occasional paper published this week. Trend growth differences accounted for about four-fifths of the variation in growth since the euro’s launch in 1999, according to a graph. By contrast, the business cycle accounted for the bulk of the rather larger growth variation from 1970 to the mid-1980s. Demography played a big role in the growth differences, with rising working-age populations supporting growth in Spain, Ireland and Luxembourg, while the opposite pulled down growth in Germany, Italy and the Netherlands. Greece, Spain and Ireland had persistently outperformed the eurozone growth average, while Germany and Italy had underperformed from the mid-1990s onward. Looking at different economic sectors, construction and agriculture growth varied most between countries, while manufacturing’s contribution to growth was increasingly uniform. France and Belgium had the business cycles which most closely followed eurozone booms and busts, while Greece, Finland and Ireland had the weakest correlation.