The Fairy Tale of Equality in Europe

German economic researchers predict a growing gap between the eurozone's rich North and its impoverishing South.

BERLIN |

BERLIN (Own report) - The socio-economic gap between the rich North and the impoverishing South of the Eurozone will continue to grow, according to a recent study by the business-oriented Cologne Institute for Economic Research (IW). The gap within the eurozone had already significantly grown between 2009 and 2018, with the economy of the North having grown by 37.2 percent, while by only 14.6 percent in the South. This development will continue over the next 25 years, the IW predicts. The IW notes a certain catch-up effect in Eastern Europe, which, however, will not lead to their catching up to the West, due to the desolate starting point following the deindustrialization of the 1990s. The region's basically unaltered function as an extended workbench, particularly for the German export industry, does not provide for a perspective of independent growth. Observers expect that the corona crisis will additionally widen the gap between the North and the South. German trade surplus and Berlin's austerity dictates are the real reasons for this inequality.

The South Continues to Lose Ground

A recently published study by the business-oriented Cologne Institute for Economic Research (IW) documents the growing socio-economic gap developing within the eurozone.[1]The study evaluates the EU countries' economic performance between 2009 and 2018 dividing them up into three regional groups: Northern Europe, Eastern Europe - comprising the national economies that joined the EU in the course of its eastward expansion - and the EU's South, including France. The findings show that the alleged equality in Europe is a "mistake," according to a report issued at the presentation of the study in late October. The goal of adjusting the economic performance is drifting "ever further away" for the South.[2] During that period, the economic performance of Northern and Northwestern Europe grew by 37.2 percent and by only 14.6 percent in the EU's South, the IW writes. This leads to a steadily growing economic preponderance of the North over the eurozone's southern periphery. Because the French economic growth is distorting the economic cycle of the South, it has to be taken into consideration, the study notes, without it, the South European countries would have achieved an economic growth of only 9.9 percent between 2009 and 2018 - on the average less than one percent annually. The North is increasingly "veering off" from the South. The "debt crisis" in the eurozone and the "deep recessions in the countries concerned" are cited as the causes of the eurozone's drifting apart. Even countries, which initially had benefited from the euro's introduction and the "sharp decrease in the costs of financing," have been "economically set back" in the wake of the euro crisis. "Exclusively Greek regions," whose economic performance "shrank by up to one fifth" during the evaluated decade, make up the taillights in the study.

The East is Somewhat Catching Up

In Eastern Europe, on the other hand, which primarily serves as an extended workbench for export-oriented German companies, a certain economic catch-up effect could be noted between 2009 and 2018, according to the IW study.[3] During that period, the GDP of that region - which joined the EU in two waves (2004 and 2007) - grew by an average of 49.6 percent. As has widely been noted, the socio-economic gap is "still considerable" despite the catch-up race. This is due to the fact that in the 1990s, these former socialist countries had gone through a disastrous transformation of systems accompanied by comprehensive deindustrialization, which sank them to a low socio-economic level, by the time they joined the EU. In the medium term, it does not seem that there will be a real adjustment of the socio-economic levels between the East and the West, primarily because a large portion of the reindustrialization of the EU's eastern periphery still depends on west European - particularly German - companies' investments.

From Freiburg to Mannheim

The authors of the IW study also assume that, in the years ahead, the EU's north and south will drift even further apart. To illustrate the substantial northward shift of the EU's economic center of gravity, the IW calculated "Europe's economic epicenter," from where "economic performance is approximately the same in all directions." Since 2009, i.e. since the outbreak of the euro crisis, this point, which also marks the fulcrum of economic performance within the EU, has, geographically, consistently shifted northward, the IW noted. In 2008, it was still located "to the southeast of Freiburg in Breisgau," then, by 2018, it had migrated 50 km northward, to be found today "southeast of Offenburg in Baden-Wurttemberg." The IW study predicts that this trend will continue for the next 25 years. In 2045, the EU's economic fulcrum will be "near Mannheim."

The Pandemic as Source of Dissention

Observers consider that the EU's Economic Stimulus Program, passed in the summer of 2020 in reaction to the pandemic-induced economic slump, is hardly bridging the EU's economic imbalance.[4] Although a large portion of the finances will be flowing into the southern eurozone, it is noted, however, that it is unlikely that this will occur fast enough to be able to counter the current recession. Of the approx. €209 billion in grants and credits that the Italians, for example, are hoping to receive, only a "minute portion" will be remitted in the course of the coming year. The "larger portion of the amount" will only be available in 2022. Therefore it is unlikely that the means for managing the economic crisis will, in fact, be of aid to the southern European countries. They would likely "ensure more long-term growth." However, by 2022, the economic gap between the north and the south will be wider, given the fact that the southern periphery has been much harder hit by the consequences of the Covid-19 pandemic than the northern center. At mid-year, observers were already predicting that the "corona recession" would divide the EU even further, since the South would be suffering particularly hard from the loss of tourism revenues.[5] The EU Commission's most recent forecasts assume a slump of 7.8 percent in the eurozone and 7.4 percent throughout the EU, with the commission specifically pointing to the different "economic impacts of the pandemic" within the Union.[6] Countries, such as Italy, Spain or France, must this year expect a contraction of their economic performance in double-digit percentage points, while Germany can hope for a decline of "only" around 6 percent. Already in May, key media organs were predicting that Germany, therefore, will exit "the crisis stronger" than its European rivals.[7]

Causes of German Predominance

Germany's economic predominance - which has been steadily strengthened since the euro crisis - is due essentially to two long-term factors: to the extreme disparities in trade balances of EU countries and due to the austerity regime that Germany's former Minister of Finances Wolfgang Schäuble had imposed on the southern peripheral eurozone following the outbreak of the euro crisis. Following the introduction of the euro and after "domestic devaluation" in the course of its Agenda 2010 and Hartz IV, Germany accumulated massive trade surpluses of more than €1.5 trillion by 2019 vis à vis the eurozone countries. These trade surpluses - amassed using the classical beggar-thy-neighbor policy - led to a deindustrialization and creation of deficits - or indebtedness - primarily in southern eurozone countries. In relationship to the eurozone, Germany's annual trade surplus grew from around €47 billion in 2000 to more than €87 billion in 2004 to €114 billion in 2007, at the time the debt and real estate bubbles reached their peaks in the EU. After the outbreak of the euro crisis, Germany's export surpluses within the eurozone sank to €60 billion in 2013, only to quickly rise again to the pre-crisis level of €82 to €90 billion from 2017 to 2019. For over two decades, the euro - while depriving the currency zone's peripheral national economies the possibility of reacting to German trade surpluses with currency devaluations - made it possible for Germany's export industry to strengthen its position on the world market at the expense of its European competitors, while simultaneously entrenching Germany's economic predominance over the EU. To this should be added the EU's strict austerity policy, imposed by former German Finance Minister Wolfgang Schäuble on the currency zone, which at the time of his resignation, was characterized even by German critics as a "policy of destruction."[8] Berlin's austerity program "cost the eurozone billions in economic performance and millions of jobs," it was noted. Due to Schäuble's austerity policy, countries such as France and Italy had lost "around six percent" - Spain even around 14 percent - of their economic performance. Besides the direct damages suffered by the countries in question, this has implacably widened the economic gap between the temporary world export champion, Germany, and the eurozone's southern periphery.

 

[1] Der Süden verliert weiter an Boden. iwd.de 10.11.2020.

[2] Tobias Kaiser: Der Irrtum von mehr Gleichheit in Europa. welt.de 20.10.2020.

[3] IW-Studie: Nord- und Südeuropa driften wirtschaftlich auseinander. oldenburger-onlinezeitung.de 20.10.2020.

[4] Tobias Kaiser: Der Irrtum von mehr Gleichheit in Europa. welt.de 20.10.2020.

[5] Oliver Grimm, Matthias Auer: Die Coronarezession spaltet Europa. diepresse.com 07.07.2020.

[6] Herbstprognose 2020: Unterbrechung der wirtschaftliche Erholung - Wiederaufflammen der Pandemie führt zu verstärkter Unsicherheit. ec.europa.eu 05.11.2020.

[7] Notker Blechner: Deutschland kommt stärker aus der Krise. tagesschau.de 08.05.2020.

[8] Stephan Kaufmann: Eine Politik der Zerstörung. fr.de 03.03.2017.