Heterogeneous economic growth vulnerability across Euro Area countries under stressed scenarios

TL;DR

This paper assesses the economic growth vulnerability of the four largest Euro Area countries under stressed macroeconomic and financial scenarios, highlighting the importance of monitoring both local and EA-wide conditions.

Contribution

It introduces a quantile-based measure of growth vulnerability and analyzes how macroeconomic and financial stressors differently impact Germany and Spain.

Findings

Germany is more exposed to EA-wide economic conditions.

Spain's vulnerability is driven by sectoral dynamics.

Financial factors amplify macroeconomic stress effects.

Abstract

We analyse economic growth vulnerability of the four largest Euro Area (EA) countries under stressed macroeconomic and financial conditions. Vulnerability, measured as a lower quantile of the growth distribution conditional on EA-wide and country-specific underlying factors, is found to be higher in Germany, which is more exposed to EA-wide economic conditions, and in Spain, which has large country-specific sectoral dynamics. We show that, under stress, financial factors amplify adverse macroeconomic conditions. Furthermore, even severe sectoral (financial or macro) shocks, whether common or country-specific, fail to fully explain the vulnerability observed under overall stress. Our results underscore the importance of monitoring both local and EA-wide macro-financial conditions to design effective policies for mitigating growth vulnerability.