Euro Monitor 2018: As good as it gets?

Euro Monitor 2018: As good as it gets?

February 27 2019
  • What the 2018 Euro Monitor results tell us: A decade after the onset of the great financial crisis, the Eurozone as a whole appears to be in relatively good shape again. This positive economic development is reflected in the results of this year's Euro Monitor, in which we assess the stability or health of the Eurozone economies on the basis of 20 indicators in four categories: fiscal sustainability, competitiveness, employment & productivity and private & foreign debt. Despite no further improvement in 2018, at 6.8 points, the Euro Monitor rating for the Eurozone occupies the solid middle of the scale from ‘1’ to ‘10’. The last time the Eurozone received a higher Euro Monitor score was in 2001.
  • In addition to ambitious structural reforms implemented particularly in the former crisis countries, the robust economic recovery in the Eurozone over the past five years has provided some tailwind for the reduction of macroeconomic imbalances. As a result, unemployment has dropped sharply, the current account now boasts a robust surplus and the positive trend in public finances meant that in 2018, for the first time ever, all Eurozone countries registered below the 3% Maastricht criterion, with the average budget deficit coming in at 0.6% in relation to GDP.


Key findings of the 2018 : Allianz euro monitor

Overall Eurozone assessment stagnates: Economic stability in the Eurozone recorded no further improvement in 2018. The average Eurozone reading remained stuck at 6.8. Nevertheless, this result falls in the solid middle of the Euro Monitor scale, which ranges from ‘1’ to ‘10’. The last time the Eurozone received a higher score was in 2001.

Performance has not been consistently positive: Twelve countries were able to improve their ratings in 2018, compared to 2017, while five lost ground and two remained unchanged. In most countries, corporate debt ratios improved and the positive labor market development saw further gains in the employment rate and a continued decline in unemployment. There were backward steps, however, due to sluggish export growth in relation to global trade dynamics and a less favorable trend around unit labor costs in the short- as well as the long-term.

Improvement in the level indicator: The overall Eurozone rating in 2018 was supported by an increase in the level indicator. This indicator rose from 6.3 to 6.6 points in 2018 to reach the highest level since 2007. A particularly encouraging sign is the progress made in eliminating the biggest and most persistent weaknesses, namely high government debt in relation to GDP and elevated unemployment. The fact that the level indicator is still below its pre-crisis score of 6.9 points shows that the legacies of the debt crisis have not yet fully been dealt with.

Figure 1: Euro Monitor level indicator over time

Figure 1: Euro Monitor level indicator over time

Sources: Thomson Reuters Datastream, Eurostat, Allianz Research

Shorter-term trend slightly negative: The progress indicator reversed slightly in 2018. Although this sub-indicator is still sitting in favorable territory with 7.1 points for the Eurozone as a whole, the figure for 2017 was 7.2 points. By way of comparison, in the crisis-ridden year of 2009, this sub-indicator registered deep in critical territory at only 2.8 points.

Winners…: Germany remains in pole position within the Eurozone in terms of economic stability, with an overall score of 8.0 in 2018. This is due to the country's solid performance in the fiscal sustainability and private and foreign debt categories. Germany is the only EMU country that falls into the Euro Monitor’s “good” category, which requires an overall rating of ‘8’ or higher. However, its score has dropped by 0.1 points compared to 2017 and, more alarmingly, the clear reversal in the progress indicator since 2015 is evidence of Germany’s reform complacency. For 2018, Slovenia and the Netherlands share second place with 7.9 points. The positions of the top three countries remain unchanged from last year despite Germany and Slovenia witnessing a slight deterioration in the overall rating.

…and losers:  With only 5.5 points each, France and Italy together take last place in the 2018  Euro Monitor ranking. Together with Spain, this puts three EMU heavyweights at the bottom of our Eurozone comparison table. While the FR-IT duo has largely treaded water over the past decade with their Euro Monitor scores, their Eurozone peers steadily recovered – first from the great financial crisis and then the Eurozone debt crisis. As a result, the FR-IT duo has been the Euro Monitor tail light since 2016. Spain, meanwhile, has seen its rating improve notably in recent years but reform momentum reversed markedly in 2018, whereas former crisis countries such as Greece, Ireland and Portugal continued to register clear progress. Encouragement can, however, be taken from the fact that there are no longer any EMU countries with a critical rating overall, i.e. an average score of ‘4’ points or less.

Shooting stars of the year: Some Eurozone countries stood out in particular for their reform progress in 2018. Looking at Euro Monitor ranking improvements alone, the country that moved up the most was Greece, which jumped four places. Cyprus made the biggest leap in terms of the overall score, which rose by 0.6 points to 6.5. As a result, the former crisis country has climbed up two notches in our overall ranking to 15th place, having taken the bottom spot as recently as 2014. As far as the level indicator is concerned, Germany leads the field with 9.1 points. Ireland (9.0 points) and Greece (8.8 points), on the other hand, top the progress indicator ranking.

Figure 2: Euro Monitor progress indicator over time

Figure 2: Euro Monitor progress indicator over time

Sources: Thomson Reuters Datastream, Eurostat, Allianz Research

Weaknesses…: In 2018, for the first time ever, no individual Euro Monitor indicator for the Eurozone as a whole registered in the critical zone (a rating of ‘4’ or less). However, the indicators that received the lowest scores are productivity growth, export performance in relation to global trade dynamics, corporate & public debt and the unemployment rate. During the 2007-2009 downturn, it was the latter two indicators that saw a particularly strong deterioration. Worryingly, the Euro Monitor grades for public debt and unemployment are still weaker now than they were in 2007, with 13 Eurozone countries boasting a lower rating for their public debt ratios and 11 for their unemployment rate. 

Greece, Italy and France have the lowest average scores when only looking at these two indicators. Clearly, the clean-up process is not yet complete. Further headway in reducing macroeconomic imbalances is called for to make the Eurozone more resilient.

... and strengths: Once again, the best results were achieved in the current account indicator (average Eurozone rating: 10 points). The interest burden as a percentage of GDP, the budget deficit and exports in relation to GDP have also been positive on the whole with an average Eurozone rating of ‘9’ points.

2019 Euro Monitor preview 

Prospects for further Euro Monitor rating improvements are rather dim. For one, going forward, macroeconomic imbalances will no longer just melt away as the Eurozone economic upswing continues to slow. In addition, Eurozone reform momentum has clearly passed its peak and is unlikely to re-accelerate any time soon. In fact the rising political instability at the national as well as the EU level, driven by the surge in populism, evaporating mainstream majorities and the increasing fragmentation of the political landscape, is undermining the already weakened European consensus in favor of macroeconomic convergence and fiscal discipline. This development poses a clear threat to the stability of the Eurozone. Italy serves as a prime example where the populist government’s reversal of structural reforms and increase in non-productive public spending has raised the country’s – and in turn also the Eurozone’s – crisis vulnerability markedly. At the EU level, the strong faring of populists in the looming parliamentary elections in May 2019 will likely boost their influence on the EU policy agenda and could further embolden national populist parties to push ahead with their agendas, even if these clash with EU rules. Core countries, on the other hand, are likely to be more reluctant to push ahead with EU integration and to agree to more burden-sharing in such an environment. Moreover, amid a renewed economic downturn, the high degree of political fragmentation lowers the probability that Europe will be able to agree in a timely manner on concerted action to stabilize the economy. Only a marked political rethink – at the national as well as the European level – could help turn this trend around. Without it, the 2018 Euro Monitor results are probably a case of as good as it gets.

Table 1: Euro Monitor Rating 2018

Table 1: Euro Monitor Rating 2018

Sources: Thomson Reuters Datastream, Eurostat, Allianz Research


Six countries in focus: Germany, France, Italy, Spain, the Netherlands and Greece

Germany: Once again in pole position, but reform complacency is a concern

Despite a slight decline in the overall score from 8.1 points in 2017 to 8.0, Germany for the fifth consecutive year successfully defended its top ranking in the Euro Monitor ranking.

However, if Germany does not step up its reform game, the Euro Monitor pole position will soon be occupied by another Eurozone country. Reform momentum in Germany – as measured by the progress indicator – declined to 6.9 points (2017: 7.2) – the lowest rating since 2013. As a result, Germany now occupies the lower mid-field position (rank 13) within the Eurozone – down from 2nd place as recently as 2014. This is Germany’s lowest ranking position in the progress indicator since the inception of the Euro. The apparent reform complacency could clearly put Germany’s economic prosperity at risk. By comparison, at 9.1 points, Germany still fares exceptionally well in the level indicator, thanks to the country's low debt ratios, strong labor market and an overall favorable international competitive position.

Weak labor productivity has been the Achilles heel of the German economy for some years now. Once again, it increased by less than 0.5% in 2017, despite the very robust economic conditions. Worryingly, with a rating of 4 points, this indicator now registers in the critical territory.

France: Bottom place and dim prospects for improvement

France has been treading water for some time now. With an overall score of 5.5, the country has now taken the Euro Monitor’s bottom spot for the third consecutive year – even if in 2018 the honor is not exclusive but rather shared with Italy.  A consistently weak progress indicator compared to other Eurozone countries – since 2014 France has ranked among the bottom three in the progress indicator sub-rating – highlights that the country has failed to keep up with its peers. Prospects for a near-term boost to Macron’s reform agenda are however rather dim in light of the persistent momentum around the “Yellow West’” movement.

There are two indicators for which France receives the lowest possible score of 1, namely its share in global exports and the level of corporate debt. The latter towers at more than 140% of GDP and while the upward trend moderated slightly in 2018 it remains unbroken. On the positive side, however, unit labor costs continue to develop quite favorably, with the annual change registering below the one observed in Germany for the seventh consecutive year now.

Compared to 2017, France’s performance in the category ‘Employment & productivity’ deteriorated the most. With an overall score of 5.4 points, France now has the worst rating in this area after Greece and Italy. Worryingly, the positive labor market trend lost momentum in 2018, despite unemployment at 9% still registering above the pre-crisis level. Productivity growth also declined in 2018 but still slightly exceeded the Eurozone average of 0.7%.

Italy: Stagnation in 2018 does not yet reflect recent reform backtracking

Italy together with France occupies the bottom spot in the 2018 Euro Monitor ranking with a rating of 5.5 points – unchanged from the previous year. While Italy’s level indicator has remained stuck at 4.3 points, the lowest rating among Eurozone countries and just above the critical mark, the progress indicator has in fact hinted at a timid positive trend in 2018. However, the populist government’s reversal of structural reforms and increase in non-productive public consumption towards the turn of 2018/19 is likely to trigger a clear deterioration in Italy’s 2019 Euro Monitor rating.

Apart from the category private & foreign debt, where Italy is at an advantage due to moderate and declining household and corporate debt, as well as a robust current account surplus, the country’s Euro Monitor scores are well below the European average in all other categories. Its major weak spots are government debt (131% relative to GDP, the second highest in the Eurozone) and the still precarious labor market situation. In this context, encouragement can be taken from the progress made in reducing the budget deficit to below 2% of economic output and the sustained growth in employment of around 1% annually since 2016.  However, the dim economic outlook for Italy, together with the government’s fiscal policy, suggests no further improvements should be expected on this front. 

In 2018, Italy saw a strong deterioration in the category competitiveness due to an unfavorable development in the unit labor cost trend, as well as a weak performance of Italian exports in relation to global trade dynamics. This is a major concern with the export nation’s economic wealth heavily dependent on its external competitiveness. 

Spain: Too early to loosen the reform reigns

A decline of 0.2 points in its Euro Monitor rating – one of the largest observed among all Eurozone countries in 2018 – saw Spain slide down five places to rank 17.  This is the first setback for Spain after nine consecutive years of progress in reducing its macroeconomic imbalances, a painstaking process driven by ambitious structural reforms and, more recently, buoyant economic growth. The loss of reform momentum, which is most pronounced in the Euro Monitor category competitiveness, is clearly premature: Spain’s ongoing poor position in the level indicator ranking (15) highlights that the clean-up process is not complete yet.

The Spanish labor market is clearly on the rebound. Although the ratings for the unemployment (15.3%) and employment rate (62.2%) are still in critical territory, significant progress has been made over the past few years with regard to these two indicators, which has been rewarded with top grades in 2018 for the fourth consecutive year.

Relative to the country's strong economic recovery, the consolidation of Spain’s public finances is making only sluggish headway. Although Spain’s real GDP has risen by more than 2.5% each year since 2015, government debt has fallen little more than three percentage points in total over the same period. At 97% of GDP, this remains notably above its pre-crisis low (36% in 2007).  The Spanish budget deficit finally complying with the Maastricht deficit criterion (2.7% of GDP) in 2018 - after being in violation for ten consecutive years - provides evidence that fiscal consolidation is at least moving in the right direction, albeit slowly.

The Netherlands: A worthy contender for the top spot

The Netherlands successfully defended its silver medal but with an overall rating of 7.9 points in 2018 is sharing the honor with Slovenia. A good score in the level indicator (7.6 points), coupled with a strong faring in the progress indicator (8.3 points), makes the Netherlands a worthy contender for the Euro Monitor’s top spot going forward.

The country does particularly well in the categories fiscal sustainability and ‘Employment & productivity’. Its Achilles heel nevertheless remains the high level of household and corporate debt. Encouragingly, though, debt levels in both sectors have embarked on a pronounced downward trend since 2014, helped by the strong economic upswing.

In 2018, the Netherlands saw a marked decline in the ratings of several indicators related to its competitive position. A less favorable trend in unit labor costs, a weakening export performance in relation to global trade dynamics and slowing productivity growth bode ill for the country’s growth prospects, given its export-dependence.

Greece: Recovery process shifts up a gear

Thanks to a 0.5 point improvement in its overall assessment to 6.8 points, Greece moves up four places in the Eurozone ranking to number 12, leaving core countries, including Belgium and Finland, behind it.

The imbalances are, however, still too great and the progress is still too little in comparison. Although the progress indicator sub-ranking shows Greece in second place with 8.8 points, the level indicator at 4.7 points is only enough to get the country the 18th spot. The acceleration in the economic recovery (we expect annual economic growth of above 2% for 2018-20) is likely to help reduce the macroeconomic imbalances going forward. In particular, the already very positive labor market trend (employment growth came in at around 2% in 2018) is likely to continue. Nevertheless, Greece will have to stay on a reform course for some years to come to ensure a full recovery of its economy.

The very favorable development of unit labor costs shows that the reforms are bearing fruit. Relative to their level in 2010, these costs have fallen by more than 11%. Greek exports are clear beneficiaries: Greece is one of only three Eurozone countries – together with Portugal and Slovenia – where exports have grown faster than global trade for five consecutive years. As a result, Greece has seen its share in world trade rise in 2018.

Senior Economist for Europe