The Dutch Disease of the Euro Area Peripheral Member States

Abstract

ABSTRACT This study analyzes explanations identified in the literature for the subpar economic performance of the so-called peripheral member states of the Euro Area since the mid-1990s, comparing it to those of the core, catch-up, and financial hub member states. It argues that a key factor in the peripherals’ malaise was a financial Dutch disease-like mechanism, as the adoption of the euro led to large and sustained capital inflows. This resulted in a structural shift in the productive structure of peripheral economies away from technologically advanced manufactured goods, which are characterized by higher productivity growth. Consequently, peripheral member states specialized in non-tradable sectors, and in low-technology and labor-intensive tradable goods and services sectors, which largely explains the peripherals’ low economic growth, low productivity growth, and growing macroeconomic imbalances. Furthermore, this study argues that the economic underperformance of catch-up member states can also be explained by a financial Dutch disease mechanism.