Secular stagnation and core-periphery uneven development in post-crisis eurozone

In this paper, we analyse secular stagnation in the eurozone. We adopt a core-periphery perspective, and analyse whether the 2007-2008 financial crisis triggered off diverging dynamics in the growth potential of core and peripheral eurozone countries. We find that secular stagnation affects the whole eurozone, but is a much more serious concern in peripheral countries. Among the components of potential output, the NAIRU shows a worrisome diverging evolution since 2008. It has remained broadly constant in the core whilst doubling in the periphery. We find that the pronounced increase in the NAIRU in the periphery is strongly related to demand-side factors such as investment demand and fiscal consolidation rather than rigid labour market institutions. The negative effect that fiscal contractions may have on the NAIRU is a novel theoretical contribution of this paper. In line with these findings, we argue that reforms in the eurozone should focus on the creation of macroeconomic institutions ensuring convergence in financial and macroeconomic conditions among member countries rather than on the generalised deregulation of labour markets.