Asymmetric Shocks in the Euro Area: Convergence or Divergence?

The degree of structural divergence in the Euro Area is examined on the basis of the frequency and distribution of observed asymmetric shocks over the period 1996–2015. An asymmetric shock is defined as an opposite sign difference between the deviation of an individual country’s GDP growth rate from a trend and the deviation of the EA-wide GDP growth rate from a trend. Two measures of asymmetric shocks are introduced, one based on exponential trend values and another on moving-average trend values. Geographical distribution of observed (“revealed”) shocks shows that EA member countries differ in terms of structural convergence, with a higher number of asymmetric shocks in countries that joined the EA at a later date. The distribution of asymmetric shocks over time shows two peaks in the number of shocks around 2002 and 2011, but no clear tendency towards more divergence is detected. As actual data may not provide a full picture of asymmetric shocks (given that countries with sufficient fiscal space could have neutralized their negative impact on GDP growth rates) a hypothesis on the existence of “non-revealed” negative asymmetric shocks is examined. Testing for correlation between public debt levels and GDP growth rate deviations confirms the existence of “non-revealed” asymmetric shocks in low-debt countries. In general, the observed differences in the number of asymmetric shocks in EA member countries (and their increases over time) may actually reflect different fiscal policy reactions in individual countries as well as the impact of financial and debt crises, and are not necessarily an indication of widening structural divergence across the EA.