Eurozone: Trouble in the core? by Simon Tilford
Many people lazily assume that the eurozone is now split into a strong, prosperous core and a weak, depressed periphery. Southern Europe and Ireland – the periphery – face exceptional economic weakness as they tighten fiscal policy and undergo a painful period of internal devaluation in a drive to reduce their costs relative to the core. By contrast, Germany, Austria, the Netherlands and Finland – the core – are assumed to be structurally robust economies, with sound public finances, competitive export industries, and good economic prospects. The reality is different and more worrying. There is no doubting the existence of an arc of depression. Greece, Ireland and Portugal have already suffered huge collapses in economic activity. In the case of Greece and Portugal there is more to come, whereas Ireland faces stagnation. Italy is rapidly sliding into the depression camp: the Italian economy is now 7 per cent short of its pre-crisis peak and will contract sharply in 2013. The picture is similarly grim in Spain. What about the eurozone’s prosperous core? Germany’s economy is growing, albeit slowly (it expanded by 0.9 per cent over the last year), and is around 2 per cent bigger than in the first quarter of 2008. This compares well with the periphery, and with the UK (whose economy is still 3 per cent short of its pre-crisis size). But it can hardly be described as dazzling; even the best performing economy in the eurozone is lagging the supposedly crisis-hit US.
Despite very low real interest rates, a relatively expansionary fiscal policy and low unemployment, domestic demand in Germany is barely growing. Investment has fallen for three straight quarters and is still down 8 per cent relative to its pre-crisis peak. The much prophesied surge in consumption has not materialised; private consumption has risen by just 0.6 per cent over the last year. Foreign demand is again the key source of stimulus – export growth easily outstripped that of imports during the 12 months to September 2012. What about the rest of the core? Austria is performing pretty much in line with Germany. But Finland and the Netherlands are doing far worse. Finland’s economy stagnated over the last year, whereas the Dutch one contracted by over 1.4 per cent. Strikingly, the Dutch economy is still 3 per cent short of its pre-crisis peak. The Finnish gap is