In spite of a wider global recovery, the economic divide within Europe has grown more prominent. Indeed, the region will continue to experience a split between the countries enjoying decent growth in the north, and those in the south experiencing more sluggish progress.
For our purposes, the classification of the northern eurozone (Germany, Netherlands, Belgium, Austria and Finland) and the southern (France, Spain, Italy, Portugal, Greece and Ireland) is not according to financial markets’ perception, but to the countries’ economic structure.
There are two scenarios that could unfold. The first is negative – that the south is dragging the north down. The second is more positive – in this scenario, the north is pulling up the south.
Why is this split becoming more prominent? In Spain, Italy and Portugal, both the level of GDP and the level of industrial production capacity have declined considerably since the financial crisis. This destruction of production capacity in the southern eurozone is a consequence of the massive decline in industrial domestic demand in these countries.
This has led to a hollowing out of their economies: as domestic demand has declined to ensure the external equilibrium, these countries have experienced a decline in production capacity, emigration and a slowdown in capital accumulation.
While countries such as Germany, Austria and Belgium have nearly full employment, unemployment in the rest of the eurozone is high. Therefore, the current likelihood is that the south is dragging the north down.
That said, it is possible to point out exceptions. The deterioration of Finland’s economic situation is one example of divergence from this pattern, while Ireland’s considerable improvement is another. And while exports in volume terms from the southern eurozone are growing slightly faster than those from the northern eurozone, this is not due to southern exports to the north.
Can the south be pulled up? In Germany, for example, the rapid growth in domestic demand has the potential to drive growth in other eurozone countries. Furthermore, the faster growth in labour costs and prices should help improve their competitiveness and regain market share.
But the lack of co-ordination in economic policies and the normal internal functioning of labour markets have meant that – while there is a marked upturn in domestic demand in Germany – it has not led to any recovery in eurozone exports to Germany.
The belief that the momentum of domestic demand and the rise in production costs in the northern eurozone will boost exports, competitiveness and eventually growth in the southern eurozone is looking unlikely. The negative scenario is prevailing.
Patrick Artus is chief economist at Natixis
