EUROPE HAS AMERICA´S GLOBALIZATION PROBLEMS ON STEROIDS / THE WALL STREET JOURNAL

Europe Has America’s Globalization Problems on Steroids

The eurozone is grappling with a slowdown in China, but its regional divergences are a much bigger long-term issue

By Jon Sindreu


Traditional powerhouse regions in France and northern Italy have lost ground to Germany in recent years. This picture from 2014 shows a closed Michelin tire factory in central France. Photo: guillaume souvant/Agence France-Presse/Getty Images


Two decades after the launch of Europe’s single currency, the eurozone is again flirting with recession. It is fashionable—and reasonable—to blame the euro’s unfinished design, but even the most radical currency reforms wouldn’t solve the continent’s biggest underlying problem: Regional inequality.

Recent data has showed Italy in recession and Germany very close to one amid challenges for its car industry. Mercedes-maker Daimler cut its dividend Wednesday following a run of profit warnings. Europe’s growth strategy in recent years has been to focus on exports, which are now vulnerable given the slowdown in China.

The euro does bear a lot of blame. Unlike the dollar, the common currency isn’t backed by a single sovereign debt market that allows for mutualized government spending during crises.

This leads to bouts of high unemployment in Southern Europe and recurrent financial panics such as last year’s Italian debt crisis.

But the bloc’s challenges go much further than just pooling debts—which has already proven difficult. German cars are one of a diminishing number of increasingly powerful engines on which the European economy has come to rely.

Since the 1970s, productivity has become concentrated globally in companies big or specialized enough to hog a large share of their market. Economies of scale have always powered economic development, but globalization has multiplied their rewards. The fate of regions hosting winners and losers has diverged, with regional inequality rising sharply across the world—including the U. S.—and fueling the rhetoric of antiestablishment parties.

But economic integration has been more ambitious in Europe than elsewhere. Regional disparities have surged, according to a data set by economic historians Joan Rosés and Nikolaus Wolf stretching back to 1900. The winners have been capitals where big banks and other multinationals have set up shop, such as Paris, London and Madrid, as well as regions hosting Europe’s top industrial companies and their supply chains, such as Germany’s Bavaria—home to Siemensand BMW .The losers are former bastions of heavy industry, including some regions within Germany itself.

Sure, catch-up growth in countries recovering from dictatorships like Spain and Greece and development spending by Brussels did allow some poorer regions to outperform in the run-up to the financial crisis.

Yet most of them faltered after 2008. Only traditional powerhouse regions in France and northern Italy are left to lead growth, but they lost ground to Germany after the euro’s creation in 1999 eliminated some remaining trade frictions. And unlike the U.S. and China, Europe has missed out on building up its own technology sector. 






Countries are morphing into large economic peripheries lagging a few ultra-productive centers.


This problem is particularly intractable for a bloc where language and cultural differences disincentivize workers to move. Necessary steps toward integration may even aggravate it: A more consolidated European banking union is likely to focus credit on fewer regions than before.

Germany’s export problems may pass. The continent’s divergence between a productive center and unproductive periphery looks worryingly permanent.