A story of Europe’s fraternal twins
In one part of the advanced world, home to 150 million people, the recovery from the financial crisis that began in 2007 is now proceeding remarkably smoothly.
Here, people are enjoying average incomes of more than $40,000 (€21,500) a year. According to figures from the Organisation for Economic Co-operation and Development (OECD), has either fallen since the 1980s or has not risen. During the same period, inequality has significantly worsened in several other advanced economies, including the United States and the United Kingdom.
With the very important exception of certain racial minorities, most of this fortunate group of 150m live in well-built houses, have access to excellent healthcare and social services and to reasonably good-quality education – although there is room for considerable improvement.
So where is this blessed land? It is in the middle of Europe. It is known as France/Germany. In this region of the eurozone, economic growth has picked up sharply. After a stellar 2010 (up 3.6%), output in Germany leapt again in the first quarter of 2011, this time at a startling annualised rate of 6.1%. In France, after a more measured upswing in 2010 (up 1.6%), output grew at an annual rate of 4% in the first quarter.
These European twins complement each other economically. In France, it has been strong consumption, Germany’s Achilles heel, that has underpinned growth. Conversely, France’s weakness in traded goods remains Germany’s greatest strength.
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Germany, unlike France, has also been enjoying fast-falling unemployment. Quite suddenly, it is the success of Germany’s social market economy (not the alleged benefits of the Anglo-Saxon’s ‘flexible’ labour-markets model) that is catching the eye of curious professional economists.
Indeed, in its monthly report last week, Germany’s central bank even pinned its optimistic assessment of prospects for 2011 – real output growth of 3.4% – in part on its expectation that the striking improvement in Germany’s labour market would gain traction, so boosting domestic demand.
In a politically interesting judgment, it even suggests that, as earlier restrictions expire, increasing migration from EU member states in central and eastern Europe could help support consumption and, thereby, the economic upswing.
Both France and (especially) Germany are hi-tech powers with broadly based corporate sectors. Together, they put in the shade the UK’s industrial sector and its puny corporate research and development base.
It is true that the French budget deficit is still uncomfortably large, at 7% last year – compared with Germany’s 3% (a figure that is falling fast). And in both countries the scale of accumulated debt as a proportion of gross domestic product (80%) could br seriously destabilising. But government finances are, arguably, less immediately threatening than in, say, the US, and neither country seems (yet) to feel the need to hack away at its welfare state with the ruthless determination of the British.
Lump together the French and German economies, which together account for more than 35% of the EU’s output, and you could convince yourself that the EU – and especially the eurozone – was in rude good health.
After all, the troubled countries of the periphery – Greece, Ireland and Portugal – account for less than 5% of the EU’s output. Remember, too, that the Benelux countries, Finland and Sweden have also been performing well. And in the east, Poland – a big, albeit relatively poor, country with a population of 38 million and an income per person of around $16,000 (€11,500) – has weathered the global financial crisis better than any other EU member state.
Strengths and weaknesses
What is the point of these comparisons? Well, it is worth reminding ourselves from time to time that Europe has strengths as well as weaknesses. Yes, the sovereign-debt crises that are giving the eurozone’s political elites sleepless nights could, if mishandled, present an existential threat to some of Europe’s banks and, thus, to the stability of its weakened financial system – and ultimately to Europe’s political cohesion.
But as Wolfgang Schäuble, Germany’s finance minister, rightly pointed out in Brussels last week at the annual Economic Forum organised by the European Commission, it is misleading to see debt crises in certain eurozone countries as necessarily a crisis of European monetary union itself.
On the contrary, how would the EU have looked without the single currency, he wondered. “It is the euro that protects us…[Without it] we would have seen large distortions in the [European] system of currencies…the result would have been terrible damage to most of our economies,” he argued.
What is more, beneath the hype from investment banks such as Goldman Sachs, it is worth remembering that the supposedly super-dynamic emerging economies, led by China, have deep vulnerabilities themselves.
China is likely to be the country that contributes most to global growth between 2007 and 2012, according to the Commission’s spring 2011 economic forecast. This is a boon to German exporters.
But we should not expect this benign outlook to extend indefinitely. Most emerging markets, including China, are now struggling with inflation and asset-price booms. The Commission forecasts that by 2012, China’s economy will have slowed nicely, to a politically and economically desirable growth rate of 9%. Such a ‘soft landing’ is easy to forecast; it is already proving much harder to achieve.
But the real concern for ‘core Europe’ is that the undeniably buoyant growth it is seeing at present could give way to a much drearier future. As José Ángel Gurría, the secretary-general of the OECD, pointed out at the Economic Forum last week: “European economic growth over the next 15 years will be at only half the rate (around 1%) experienced over the 1995-2010 period.”
So, forget the cyclical upswing that France and Germany are enjoying. The OECD is right. The biggest challenge the EU faces is to avoid stumbling into a protracted period of economic stagnation, due in part to its aging populations. That would really put pressure on our ability to overcome our budgetary imbalances, sustain our welfare states and maintain our living standards.
Stewart Fleming is a freelance journalist based in London.