L’Europe, de réelles avancées mais des choix à assumer

If the European Union has so far managed the COVID-19 crisis well, worrying long-term trends remain at work. There is no observable convergence in trade balances, with France's trade balance in particular showing no sign of recovery. Nor is there any sign of convergence in income per capita: Italy's GDP per capita remains about 25% lower than Germany's. Public debt levels also remain heterogeneous within the euro area, despite low interest burdens of around 1% of GDP, down from levels above 3%. By contrast, other indicators point to some convergence: unemployment rates have declined since their peak in 2012, which followed the poor management of the European sovereign debt crisis, and unit labor costs have been converging since 2015, notably due to rising German wages catching up with the European Union average. Five (sometimes conflicting) explanations account for these trends, each pointing to specific directions for reforming European rules and institutions: inflation differentials, excessive demand in the South, insufficient demand in the North, industrial policy, and financial imperfections. From these analyses, we derive four recommendations. First, policies to stimulate domestic demand in countries with large trade surpluses should be implemented, notably through increased public investment and more accommodative fiscal policies in Northern Europe. Second, EU industrial policy must be more ambitious in light of current economic challenges.