The very significant heterogeneity to be expected in the euro zone: What consequences?

- "In the euro zone, there are currently:
• on the one hand, countries that hardly benefit from the growth in global trade and in emerging countries, and where, moreover, corporate profitability is insufficient, which forces them to squeeze wages (France, Spain, Italy, Portugal);
• on the other hand, countries that benefit from the growth in emerging countries and where the improvement in profitability (in self-financing) already undertaken is favourable both for the prospects for corporate investment and for the possibility to see increasing wages (Germany, Netherlands, Finland, Belgium, Ireland)."
- "This means that the euro zone will probably be split in two groups of countries, some with sluggish growth, others with "decent" growth."
- "The first countries will find it difficult to reduce their fiscal deficits, while the second - which will reduce them to a lesser extent - will require the first countries to do likewise. The first countries will want to keep a highly expansionary monetary policy, the second could favour a gradual return towards more neutrality in monetary policy and a reduction in liquidity."
- "A significant conflict around the guidelines of economic policies is in all likelihood looming between these groups of countries. Moreover, the presence of these two different groups of countries will make it difficult for investors to assess the euro zone’s situation, leading to ambiguity about financial market trends."

Natixis Flash Economics 414 20100825

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