There was an interesting chart in The Economist displaying GDP growth since 1999, the start of the Eurozone, for Western economies.
From a quick glance at the chart, it appears that Germany is the impressive winner, generating over 20% change in GDP per person. Spain, Greece, Portugal and Italy don’t look so good…
But why is this? Germany is always heralded for their hard work, spendthrift culture and year after year of running trade surpluses, so clearly that’s why they’ve experienced the highest growth on this chart – right? Unfortunately, no. This is a rather long story but I’ll make it short:
Germany has an export-heavy economy. After some policies led to high growth in the 90’s, Germany was worried about losing its export advantage if their currency appreciated so they were one of the lead promoters of the Eurozone. By joining the Eurozone in 1999, Germany tied the value of its currency in with the other weaker nations, effectively suppressing it from appreciating and maintaining their export advantage.
Global trade needs to be balanced, which means that if Germany runs a trade surplus, collectively, everyone else has to run an equal deficit. Germany also does quite a bit of trading with its fellow European nations, which means that by running a surplus they are forcing deficits and tough economic conditions on their neighbors to south, while also propping up the value of their currency which makes it even more difficult for them to recover. And the icing on the cake is that the Eurozone, which is heavily controlled by Germany, demands austerity from these Southern nations while Germany refuses any aid unless it is borrowed.
I just condensed a lot of economics into two very short paragraphs so I‘m sure this is tough to follow, but what I’m saying is basically that Germany distorted their economic numbers through domestic policies which simultaneously had the consequences of lower growth and higher unemployment in Southern Europe. Spain, Greece, Portugal, Italy and France are at the bottom of the chart BECAUSE Germany put itself at the top by essentially stealing their economic growth.
These distortions need to (and will be) rebalanced. Germany has two choices: 1) they can slowly, by choice, take action through policies to reverse the imbalances by reducing their trade surplus, or 2) do nothing and watch the rebalance occur through a very sharp and painful economic contraction where the countries begin to leave the Eurozone and return to their old currency to devalue to reduce their debts and increase economic production. Either way, these imbalances must eventually come to an end and unfortunately it looks like we’re on path for option #2.
This is why I don’t have a positive outlook for Europe or the Euro currency. The Euro must move lower or many Southern nations will default on their debt.
The lesson here is that one country’s gain is usually created through another country’s pain – or in this case, a few countries.
Thanks for following – I hope everyone has a great weekend!
Nick