A tale of two segments

The gap between north and south Europe is widening as Germany, France and other northern states multiply their lead over debt-ridden Italy and Spain, whose problems will worsen in coming months, according to Legal & General Investment Management economist James Carrick.

“Europe is not one country,” he said. “You’ve got two Europes. A strong north, which is doing very well, and a south that is struggling and vulnerable to being caught in a self-reinforcing spiral of cuts.”

The most visible success story is Germany, which ran a budget surplus in 2007 and 2008 that meant it could afford to pump money into the economy after the crisis. Unemployment is at its lowest point since reunification in 1991 and the country is considering tax cuts to boost consumer spending.

Importantly, the corporate sector has recovered quickly, as has the supply of credit. Carrick says it is as easy for German companies to obtain a bank loan today as it was in 2007, before the crisis.

These conditions are propelling Germany into a self-reinforcing recovery, says Carrick, something that is happening to a lesser extent in France, which also has low unemployment and loosening credit conditions.

The opposite is happening in Spain, where the government is cutting public spending in a bid to reduce the budget deficit. This is increasing unemployment, having a knock-on effect on consumer spending at the same time as banks withdraw available credit.

Carrick calls this a “self-sustaining slump”, something that is also happening in Italy, Portugal and Greece.

Because of these dynamics, the gap between the north and south Europe is growing fast. Although Carrick thinks Europe will survive the crisis, he says the imbalance shows that some of the southern countries should never have been lumped together in the same economic unit with the northern ones.

“What we’re seeing is that these countries should not have been in the euro in the first place,” he said. “The Maastricht criteria were designed to keep countries with poor finances out, but they bent the rules and let all of the countries in and it shows now that there is a problem.”

However, Carrick believes the other Eurozone countries will rally round to support the southern countries rather than admit they made a mistake. The French political class was particularly supportive of the new members, he said.

“For Greece and Spain and Italy to leave the euro, they [the French] would have to admit that they made a gigantic mistake.”

©2011 funds europe



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