Euro area growth differentials: diverging and reinforcing factors in a Kaleckian SVAR approach

The aim of this paper is to identify the euro area economic heterogeneity by disentangling the factors and characteristics shaping and exacerbating growth differentials between surplus and deficit countries. The five Kaleckian determinants of profits are used in the paper as the interpretative framework to assess the sources of divergence. According to an SVAR methodology, eight diverging factors and six reinforcing factors were detected as drivers of the differentials. It follows that the two regions represent different economic structures and that this dichotomy, in turn, means that symmetric shocks have asymmetric effects, while asymmetric shocks reinforce the regional differences. An endogenous investment-GDP feedback process and an investment-unemployment loop are mutually reinforcing mechanisms, which impair the production base and constrain future growth, so temporary shocks have long-lasting effects. The analysis emphasises the need to rethink the European macro mechanism and to achieve a common and shared macro strategy that goes beyond national political interests and inclusively pursues the same objective: convergence.