Business cycle synchronisation in the euro area

The initial global financial shock in 2008 and the subsequent collapse of global trade did not seem to affect the euro area countries asymmetrically, as all countries slipped into recession at the same time. However, the subsequent euro area sovereign crisis has propagated heterogeneously across euro area countries causing significant cross-country differences in domestic demand and resulting in large business cycle divergence between 2011 and 2013. Differences in Member Statesí debt overhang can have a negative impact on business cycle synchronisation across euro area Member States during deleveraging periods, as they make euro area-wide shocks propagate heterogeneously. As a result, they can be a major source of asymmetries. While the impact is not likely to be permanent, a long-lasting deleveraging period in some Member States can lead to a protracted period of business cycle decoupling from the rest of the euro area, making the common monetary policy less effective for certain countries. Even though differences in growth in real GDP per capita between Member States and the euro area average recently returned to pre-crisis levels, risks of asymmetric shocks in the euro area will remain significant until the ongoing balance sheet adjustment period in both private and public sectors is completed. However, policies can contribute substantially to contain risks of divergence. Recent and planned institutional and structural changes, including the Banking Union, the Capital Markets Union and in structural reforms in Member States, have a key role to play in this respect.