July 29, 2015 / 9:50 AM / 4 years ago

UPDATE 2-Disappointed ECB says euro zone economies further apart than at the start

(Adds further detail)

By Balazs Koranyi

FRANKFURT, July 29 (Reuters) - The euro zone’s founding members are further apart economically than they were, a “disappointing” outcome defying the premise that laggards would slowly catch up in common currency bloc, the European Central Bank said on Wednesday.

Early members failed to recognise that lower borrowing costs, a key benefit in the currency union, would only provide a temporary boost, and left unchecked, would actually lead to many of the troubles that plunged the bloc into its debt crisis.

“Progress towards real convergence among the 12 countries that formed the euro area in its initial years has been disappointing,” the ECB said in an economic bulletin.

The unusually strong commentary from the bank highlights the fragility of the currency union, which is still fighting an existential crisis after Greece came close to being forced out after years of failed reforms and ballooning debt.

Though not a founding member of the currency union, Greece was included in 2001 and was among the 12 nations that started using the euro banknotes in 2002.

Euro zone membership pushed down borrowing costs, fuelling unsustainable credit-driven growth, and governments assumed this would last, leading to unrealistic growth expectations. Once the boost ran out and growth faltered, debt levels rose quickly.

Ireland, Portugal, Cyprus and Greece have received international bailouts since the start of the euro zone debt crisis and growth across the bloc is expected to be muted for years to come.

“There is some evidence of divergence among the early adopters of the euro, given that over 15 years a number of relatively low-income countries have maintained (Spain and Portugal) or even increased (Greece) their income gaps with respect to the average,” it added.

“Moreover, Italy, initially a higher-income country, recorded the worst performance, suggesting substantial divergence from the high-income group,” it added.

Governments also kept in place rigid and protected product and labour market structures with little ability to flexibly adjust wages, exacerbating the effect of the crisis as currency devaluation could no longer be used to reestablish competitiveness.

With capital allocated to low productivity sectors, part of the protectionist framework, even relatively high productivity sectors suffered, weighing on overall growth.

Meanwhile, late jointers Estonia, Latvia, Lithuania and Slovakia have recorded the highest degree of convergence among the EU countries, the ECB added. (Reporting by Balazs Koranyi; Editing by Jeremy Gaunt)

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