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by ForexNewsNow Team on July 10, 2011

Could economists have foreseen EU problems 10 years ago?

Spain, Portugal, Ireland and Greece (P.I.G.S.) are now facing major economic issues which have gravely impacted the EU and the international economic arena as a whole.

 

But why didn’t Europe anticipate these issues earlier?

According to well-known French economist Patrick Arthus, this lack of anticipation both from private and public analysts can be explained in three main points:

 

  1. Everybody was rejoicing about the fact that all countries in the euro zone were paying the same interest rates as Germany, which explains those countries’ large debt increases, which is illustrated in the graph below:
  2. Most European analysts believed that the monetary union was creating several independent industrial entities that would continue to produce a wide range of products while, in fact, it created a situation where most European states began specializing in only a few select industries which impacted their ability to stimulate economic growth. For example, Portugal, Spain and Greece specialized in construction and domestic services which meant weak long-term growth and an increasing trade gap.
  3. Lastly, analysts did not fully recognize the weakness of the actual economic growth of some of these countries since it was obscured by the robust growth that is often created when a country is running up massive debts. For example, at the end of the construction boom in Spain, Spanish economic growth declined and did not continue on an upward path as expected whereas European economic growth in general continued to rise.

Patrick Arthus is a French economist who was designated “French Economist of the Year” in 1996 by Le nouvel économiste. He is also member of the Board of directors of TOTAL and the director of studies at the Bank Natixis.

 

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