Growth diverges across EU economies (Euro Zone)

The Business Online ^ | August 28, 2005 | Allister Heath

[lowbuck]

THE performance of the euro zone's 15 economies is continuing to diverge, fuelling fresh fears for the future of the single currency, a top French bank will warn this week.

There are still no signs of the convergence in economic growth long forecast by advocates of the single currency, according to a report by Societe Generale's Paris economists. Instead, the growth differentials among euro-zone members continue to widen, putting intense pressure on the European Central Bank's one-size-fits-all interest rates.

Since 2001, the gap in private consumption between member countries has surged to almost 15% between the best and worst performers, according to Societe Generale. Greece and Spain have had robust private consumption, whereas Germany and the Netherlands have seen consumer spending stagnate during the past four years.

Only five euro-zone members will have run out of spare capacity this year, led by Greece, Finland, Spain, Belgium and Ireland. The others are all underperforming and still have unused resources such as labour and capital.

The five best performing countries are at increasing risk of overheating, the bank said, because interest rates are below the appropriate level for these economies.

Veronique Riches-Flores, economist at Societe Generale, said: "This situation raises obvious concerns over the potential impact of such discrepancies on economic developments. The exceptional spread in output gaps between the different euro-zone partners is not sustainable without creating, at some point, some inevitable distortions."

Growth in the euro zone should be confirmed at 0.3% quarter-on-quarter and 1.2% year-on-year for the second quarter, down from 0.5% and 1.4% in the first, and back to its lowest since end-2003.

[lowbuck]

The Euro has been good in making costs "transparant" and cross border trading more friendly to business.

However, it is causing a lot of strain between the different countries because of their different "social models". The low tax and regulation countries are eating the lunch of "old Europe". Pity.

[mmercier]

>> The low tax and regulation countries are eating the lunch of "old Europe". Pity.

Will not the artificially low interest rates in the low tax countries eventually lead to over investment and increased failure (loan default) in the future...?

Capitalism needs to be lean and clean as any opportunity is inevitably exploited when the conditions permit; even a disastrous opportunity is run out till the artificial bubble inflates to the maximum and then pops.

[lowbuck]

Very good observation. As the article points out the five top performing countries are basically maxed out and the interest rate of the ECB endangers them from overheating (while at the same time not allowing expansion in poor performing countries such as France or Germany).

[JasonC]

Why would someone put a new factory in Germany when they can put it in Ireland instead? Lower taxes, cheaper workforce, better labor practices, speak English.

This is an ordinary adjustment of the distribution of capital. If the poor performers want to keep capital at home they should institute reforms similar to the fast growers. Instead they lecture them and try to rope them in to their own expensive and failed schemes.

The interest rate is far below equilibrium for the EU as a whole, trying to hold up the central basket cases through money supply growth. Doesn't work, produces only stagnation, just as it did in Japan. Structural problems are addressed only by structural reforms.

There are EU supporters who think the whole point of it is to avoid consequences of free markets and repeal the laws of economics. But the laws of economics cannot be repealed. It is a fool's errand. A continent wide single currency and free trade zone will lead to free market consequences. Avoiding them will led to stagnation or worse.

[mmercier]

So we are watching the next economic disaster in the making here...?

This is policy designed to give the advancing economies a smash in the face to slow them up a bit...?

Would not surprise me.

Anyone who lets the dogs of France and Germany into their beds will inevitably be scratching fleas.

[lowbuck]

So we are watching the next economic disaster in the making here...?

Of a sorts, although not the one that the big players in the EU (i.e. France and Germany) intended. Since the euro was introduced it has become apparent that the unreformed "socialist economies" were at a great disadvantage to the countries that had restructured theirs.

At first they screamed "tax harmonization" in the name of "social justice" (Translation: raise your tax levels to ours in the name of us giving your money to the weak and worthless). The dynamic countries told them (how do I put this delicately?) to shove it where the sun does not show.

As a result the Old Europe economies are under great pressure to reform or be run over.

Just another example of the "Law of Unintended Consequences".