Europe’s deepening economic divide will eventually rip the euro apart

It’s a classic tale of two economies, with Europe’s haves and have-nots pulling further apart and it is not going to have a happy ending. Germany’s economy is finishing 2016 on a stronger note while the euro zone’s struggling nations remain on a weak footing going into 2017. It is building into a dangerous political powder keg as Europe squares up to critical elections next year.

Many Europeans will be watching Germany’s economic performance through gritted teeth. Even if Germany’s growth record in the last year has been less than stellar, the economy is enjoying record low unemployment, rising productivity and rock solid government finances. It’s a very different picture on the other side of the tracks. Weaker euro zone economies, especially those which suffered extreme hardship during the 2008 financial crash – like Greece, Portugal, and Spain – can only look on with envy. Even the bigger nations like France and Italy remain in the doldrums, stuck in Germany’s shadow with much higher jobless rates, much poorer competitive positions and precarious public sector finances.

After a rotten third quarter, with annual GDP growth plunging down to 0.8 per cent, the early signs are that Germany’s economy is starting to bounce back. It’s all thanks to the flood of cheap money coming from the European Central Bank’s QE programme, the stimulus from the weaker euro and a better mood finally starting to surface among German consumers and businesses. According to the latest survey from Nuremberg-based research institute GfK, German consumers are feeling much more upbeat about the future thanks to record high employment, increased job security, rising real wages and low borrowing costs. It means consumer spending has replaced exports as Germany’s main economic growth driver.

The same is true for German business morale, with the benchmark IFO institute’s sentiment index ending the year on a much more cheerful note, thanks to a strong bounce in new orders. It looks like German corporate sentiment is shrugging off the risks of new US president Trump and the uncertainties thrown up by Britain’s Brexit vote. Even Germany’s central bank, the Bundesbank, seems to be more confident about the outlook going into 2017, heartened by the prospect of stronger consumer spending taking over as the main growth pillar after the recent sharp gains in German retail sales. The odds of beating next year’s 1.5 per cent official GDP growth forecast seem to have improved significantly. For Germany’s less well-off euro zone partners looking on from the sidelines, Germany’s relative economic success is no doubt going down like a lead balloon. It is especially the case when Germany is arguing for the ECB to rein in its monetary super-stimulus and when German political leaders continue to preach the case for Europe to tighten its budgetary purse strings.

What is abundantly clear is Germany’s road to economic success has been at the expense of other European country’s economic failure. The guiding principle of the EU and the euro zone is the single market, monetary union and the single currency should be based on equality and fairness. It is not supposed to be a mechanism for one country’s advantage at any others’ expense.

Yet GDP per capita figures show the economic discrepancy between Germany and its euro zone partners is getting worse not better. The disparity between Germany and Greece is so extreme it is no wonder the economics of deprivation and envy are fostering politics of national self-interest, populism and European disintegration. It could seal Europe’s downfall if left untended.

For a country like Greece, paying the price of enforced austerity with youth unemployment rising as high as 50 per cent in the last few years, the future challenge will be whether it stays a member of the euro. It is a question similarly faced by Portugal, Spain and possibly Italy too. French voters will make similar demands in next year’s elections.

The answer lies in a much fairer Europe, one that embraces a closer economic integration, but one which Germany sadly rejects right now. To complement the single market, monetary union, and the euro, Europe desperately needs fuller fiscal union. Europe is crying out for a fairer distribution of wealth and prosperity based on closely-integrated fiscal system that can reallocate resources from the well-off to the poorer euro zone nations. Without it, Europe’s divisions will widen, political disintegration will accelerate and the euro will fester and die. Europe’s policymakers only have themselves to blame if they fail.

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