Growing apart?
Aug 20th 2009
From The Economist print edition
France and Germany have emerged from recession; Italy and Spain are still struggling. Is the difference between core and periphery a problem?
Illustration by Peter Schrank
ENTHUSIASTS for European integration used to spend a lot of time fretting about a “two-speed Europe” (meaning that some countries would engage in closer integration than others). Now they are fretting about a two-speed euro zone as well.
On August 13th figures showed the euro area’s overall GDP had declined by just 0.1% in the three months to the end of June, a much smaller drop than had been expected. The currency zone’s two largest economies, France and Germany, both grew by 0.3% in a quarter when many other rich economies, including those of America and Britain, were still shrinking.
But the region’s next largest economies were still mired in recession. Spain’s shrank by 1% in the second quarter; Italy’s by 0.5%. Analysts reckon this split between a growing north and a struggling south is likely to continue. France and Germany reported that trade boosted their GDPs, suggesting that they are benefiting from the export revival spurred by emerging Asia.
Italy and Spain, meanwhile, look hamstrung by a loss of competitiveness following a long period in which unit wage costs have risen. Italy’s exporters of textiles and furniture will find their wares ill-suited to a global rebound dependent partly on Chinese investment spending. And Spain’s exporters look puny compared with the large, idle industries, such as construction, that cater to domestic demand.
A closer look at the figures, however, reveals a more complex picture than a simple north-south divide. Northern economies that are very open to trade, such as Belgium, Austria and the Netherlands, were still shrinking in the second quarter, while in the south, Portugal and Greece managed some modest growth (see chart). Look at the slump in the year to the second quarter and the pattern is more uniform, says José Luis Escrivá, at BBVA, a Madrid-based bank. Most economies shrank by 4-5%. Italy did worse, but was underperforming before the crisis. Germany was down by 5.9% or so, owing to its export dependence, but has scope to make up the lost ground as trade rebounds.
The big exception is France, which has suffered far less than most other rich countries. One reason is that it was a bit-part player in the system of global imbalances that precipitated the slump. France was neither a big supplier of international credit, like Germany or Japan, nor reliant on borrowing, like Spain, Britain or America. In good times, most of the economy’s impetus came from within so it was less exposed to trouble from without. Another factor is the French government. When private demand suddenly plunges, it helps to have a well-oiled machinery of state that can quickly step in.
On August 13th figures showed the euro area’s overall GDP had declined by just 0.1% in the three months to the end of June, a much smaller drop than had been expected. The currency zone’s two largest economies, France and Germany, both grew by 0.3% in a quarter when many other rich economies, including those of America and Britain, were still shrinking.
But the region’s next largest economies were still mired in recession. Spain’s shrank by 1% in the second quarter; Italy’s by 0.5%. Analysts reckon this split between a growing north and a struggling south is likely to continue. France and Germany reported that trade boosted their GDPs, suggesting that they are benefiting from the export revival spurred by emerging Asia.
Italy and Spain, meanwhile, look hamstrung by a loss of competitiveness following a long period in which unit wage costs have risen. Italy’s exporters of textiles and furniture will find their wares ill-suited to a global rebound dependent partly on Chinese investment spending. And Spain’s exporters look puny compared with the large, idle industries, such as construction, that cater to domestic demand.
A closer look at the figures, however, reveals a more complex picture than a simple north-south divide. Northern economies that are very open to trade, such as Belgium, Austria and the Netherlands, were still shrinking in the second quarter, while in the south, Portugal and Greece managed some modest growth (see chart). Look at the slump in the year to the second quarter and the pattern is more uniform, says José Luis Escrivá, at BBVA, a Madrid-based bank. Most economies shrank by 4-5%. Italy did worse, but was underperforming before the crisis. Germany was down by 5.9% or so, owing to its export dependence, but has scope to make up the lost ground as trade rebounds.
The big exception is France, which has suffered far less than most other rich countries. One reason is that it was a bit-part player in the system of global imbalances that precipitated the slump. France was neither a big supplier of international credit, like Germany or Japan, nor reliant on borrowing, like Spain, Britain or America. In good times, most of the economy’s impetus came from within so it was less exposed to trouble from without. Another factor is the French government. When private demand suddenly plunges, it helps to have a well-oiled machinery of state that can quickly step in.
Indeed, the scale and timing of fiscal support explains much of the recent divergence within the euro area. Consumer spending in France and Germany rose in the second quarter, thanks in large part to government subsidies on car purchases. The state in both countries has cushioned consumption indirectly by stemming job losses. In France, make-work schemes in the public sector have kept the jobless rate from rising too far, says Laurence Boone, at Barclays Capital in Paris. In Germany, the accord between industry and government to keep short-time workers on the payrolls has had a similar effect. Spain’s fiscal stimulus kicked in earlier so has had less of an impact recently. In Italy, the high level of public debt means the government could not afford much by way of state support.
Germany still has some fiscal stimulus in the pipeline, which may lift its economy above the rest for a while. Its firms were still shedding stocks in the second quarter, as they were in France, so there is scope for a rebound in inventories to spur growth. The increase in export orders should soon translate into higher export sales.
Beyond the second half of this year, however, the scope for France and Germany to pull away from the rest of the euro zone seems more limited. Germany’s exporters cannot live off China alone, and their other big customers, in America, Britain, eastern Europe and Spain, will not be as free-spending as they once were. Firms will not carry idle workers for ever.
Unemployment is likely to rise in both countries, which will hurt consumer spending. Businesses with better prospects may find it hard to get credit, as long as troubles in Germany’s banking system remain unresolved. French exporters have lost market share in recent years, according to analysis by the European Commission. That suggests France is not so well placed to benefit from the revival in global trade.
For now, the euro zone’s core countries are likely to do better than those on the periphery. But America and Britain hope to export their way out of trouble, and emerging Asia is slowly shifting towards internal sources of demand. That means the euro zone’s economies are likely to have to rely even more on each other in future.
Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved.
For now, the euro zone’s core countries are likely to do better than those on the periphery. But America and Britain hope to export their way out of trouble, and emerging Asia is slowly shifting towards internal sources of demand. That means the euro zone’s economies are likely to have to rely even more on each other in future.
Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved.
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