This section analyses structural polarisation and macroeconomic divergence in the Eurozone in conjunction with different growth models. It begins with an analysis of structural polarisation processes in pre-Corona years and continues with an analysis of the impact of the pandemic.
Structural polarisation before Corona
The gap in per capita incomes between Northern and Southern Eurozone countries has widened considerably since the birth of the Euro about twenty years ago (see Fig. 4a). Particularly the 10 years before the Corona crisis have been characterised by a persistent divergence in terms of living standards of large parts of the Eurozone, which can be traced back to the co-existence of distinct growth models within the EMU: Southern European countries mainly followed debt-led growth models, which came with increasing private-sector indebtedness, linked to the accumulation of current account deficits (e.g. Storm and Naastepad 2016). At the same time, Northern countries mainly followed export-led growth models, which came with current account surpluses and a stronger reliance on foreign trade. When the financial crisis and the subsequent Euro crisis hit, the fragility of these imbalances built up in pre-crisis times laid bare the underlying reality of macroeconomic divergence (Gräbner et al. 2020b).
Essential factors for explaining the long-term divergence of Eurozone countries are to be found in the unequal regulatory conditions in the context of the European ‘race for the best location’ (for example, in the areas of the labour market, tax and corporate law, or financial market regulation, see Kapeller et al. 2019) as well as in the different technological capabilities across EU countries (Gräbner et al. 2019, 2020b). Technological capabilities serve as an important driver of long-term economic development, and there exists a strong positive relationship between the level of economic complexity (used as a proxy for technological capabilities; see Hidalgo and Hausmann 2009) and GDP per capita levels (see Fig. 4b). The problem in the decades running up to the Corona crisis has been that the accumulation of these technological capabilities is a highly path-dependent process: in the absence of coordinated policy measures, existing differentials in technological capabilities will be self-reinforcing over time, particularly within the Eurozone, where traditional compensation mechanisms for individual member countries are either not available (currency devaluations) or severely restricted (fiscal and monetary policy) due to existing institutional arrangements.
Technological capabilities are also relevant when it comes to explaining the emergence of the unsustainable co-existence of export-driven and debt-driven growth models in the EMU: countries in the North were better equipped to follow an export-led growth model precisely because their economies have accumulated a sufficient amount of the technological capabilities necessary to compete successfully on international markets, where technological sophistication is more important than price competitiveness (Storm and Naastepad 2015; Dosi et al. 2015; Gräbner et al. 2020b). Furthermore, Northern euro countries—most of all, Germany—were able to strive over recent decades not despite, but also because of the rise of Asian economies such as China: for firms that have focused on the production of technologically complex products, the rise of Asian countries came with additional export opportunities to Asian partners, who were keen to acquire more complex products and capital goods. Technological sophistication of firms in Northern Eurozone countries represented a unique competitive advantage in the global economy that remains relevant until today.
The emergence of these different growth models also had a feedback effect on the further development of production structures: while Germany and other Northern countries have expanded their cumulative advantage in high-tech manufacturing over the past 2 decades, Southern European countries have increasingly been locked into lower-tech and non-tradable activities (e.g. Simonazzi 2013; Botta 2014). As a consequence, Northern firms often do not directly compete with Spanish, Portuguese, Greek or even most Italian firms; instead, they are price-setters due to their strong market standing, which is generated by a high degree of technological sophistication. In contrast, firms located on the Southern periphery (e.g. Greece and Portugal) are more often confined to the role of price-takers, as they compete with low-cost Asian producers (Straca 2013). As a consequence, they were much less able to base their competitiveness on technological capabilities, while competing in terms of low wages (or reduced environmental or labour protections) would also be economically infeasible and politically destructive given the current levels of wages and regulations in Europe.
In summary, most European firms with a strong technological position typically operate from their home base in Northern countries, such as Germany and Austria. Despite important exceptions, particularly in the industrial North of Italy and Spain, many firms in the Southern Eurozone are relative technological laggards and the overall international competitiveness of Southern economies has deteriorated. Due to the cumulative nature of the underlying processes, existing differences in technological capabilities are to be seen as both a driving factor as well as a major outcome of long-term divergence within the Eurozone (Gräbner et al. 2020b), which is reflected in increasing macroeconomic polarisation as captured by Fig. 4.
The asymmetric impact of the Corona Crisis
The macroeconomic impact of the Corona crisis on Northern and Southern Eurozone countries will be asymmetric due to existing differences in production structures and because of the vulnerabilities of the different growth models described above. The most recent macroeconomic forecasts suggest that domestic demand will take a bigger hit in the Southern Eurozone than in Northern Eurozone countries (see Fig. 5). Given their relatively strong reliance on domestic demand as compared to exports, this implies a particular challenge for these economies. However, Germany and other Northern Eurozone countries will also not be able to rely on export-driven growth to the same extent as in the years 2010–2019, because China and other emerging Asian economies also suffer greater economic losses, which decreases their demand for imports. Moreover, the global economy as a whole has been hit hard by the repercussions of the coronavirus (International Monetary Fund 2020), and the partial disruption of global value chains will make an export-based recovery strategy more difficult to implement in the medium term as well. However, the data in Fig. 5 suggest that the overall challenge is considerably more difficult for countries in the South, as domestic demand takes a bigger hit and exports decline more strongly.
Figure 6 provides a breakdown of declining exports in terms of exports of goods and exports of services, respectively. Thereby it points to yet another way in which structural polarisation patterns from the pre-Corona years provide the conditions for an asymmetric effect of the Corona shock: while exports of goods are set to decline to a similar extent in Northern and Southern countries, the much stronger drop in exports of services in the South exposes another vulnerability. The prospects for booming global markets for export goods have deteriorated, but the prospects for exports of services—in particular, concerning the tourism-related sectors—may be even gloomier because of shifting preferences for tourist destinations and the restrictions imposed on international travel. Prolonged restrictions will have disproportionately strong negative effects on the regions in Southern Europe, which clearly raises the prospect of accelerating macroeconomic divergence (Odendahl and Springford 2020).Footnote 4 Moreover, while at least some of the goods that have been produced for export but have not been sold yet can be put in storage and still represent an increase in value-added in the future, services that have not been demanded in the present tend to be lost forever. This suggests that the recovery process for Southern countries will be more difficult than in Northern countries.