Italy’s return to recession vs. Spain’s renewed momentum - Goldman Sachs

FXStreet (Łódź) - Andrew Benito and Lorenzo Pessina from Goldman Sachs's European Economics Team analyze the differences in Itay and Spain's economic performance following the end of recession in the Eurozone last year.

Key quotes

"On one view, the rising growth gap owes to the differing track records of structural reforms."

"On this view, Spain’s reforms – of both its labour market and banking system – have supported the mobility of labour and capitalnecessary to help return to growth and begin closing a significant margin ofspare capacity."

"An alternative view offers a demand-side explanation. On this view, the key driver has been the fact that ECB policy easing has had a larger effect in Spain than in Italy."

"Fiscal policy may also have played a role if it is the case that fiscal adjustment has slowed more in Spain than in Italy."

"In our view, demand and supply factors have interacted with each other to both play a role."

"The Euro area’s common monetary policy – a demand factor – has had different effects in Italy and Spain, owing to different degrees of pass-through."

"Supply-side reforms have helped facilitate a larger response to those measures in Spain. Spain’s financial sector reform– including the recapitalisation of its banking sector – has ensured more effective transmission of ECB policy easing to real activity."

"While labour market reforms have delivered greater wage flexibility in Spain, their main benefits in terms of activity have not yet materialised."

"Should Italy fail to deliver meaningful structural reforms, there is a risk its growth gap with
Spain will widen further."