No quick fix for Euro - maybe a slow one?

 

Stephanie Flanders analyses Germany's options

If you know anything about the Euro crisis you will know that there are "no quick fixes". But it's been going on so long now, you'd think there might have been time for a slow one.

I discussed part of the long-term economic solution to the region's problems on Wednesday night in a piece for the BBC's 10pm television news: in or out of the Euro, to have any chance of growing their way out of trouble, the crisis economies need to rebuild their competitiveness.

That means Germany has to lose some of its competitive edge, at least within the single currency zone. Why? Because, like it or not - and Germans don't - competitiveness is inherently relative.

You always have to be more or less competitive, compared with someone else.

As I have discussed many times, the huge imbalances that grew up between different parts of the Eurozone before the crisis were in large part a reflection of the fact that northern economies like Germany and the Netherlands were becoming a lot more competitive than the ones in the south.

Thursday's PMI surveys for the Eurozone make for a depressing read - there's little sign that those crisis economies are about to grow their way to a better future any time soon. Quite the opposite.

There is also disturbing evidence that the weakness in the so-called periphery countries has spread to the 'core' - not just France, where the index reflecting new manufacturing orders fell to its lowest level since 2009, but also to Germany.

Taken together, these and other recent data suggest the Eurozone will shrink in the second quarter, having only very narrowly avoided a negative figure for the first three months of 2012.

But, if you step back from the monthly and quarterly figures, there IS quite a lot of evidence that the slow economic fix to the crisis is happening.

Costs are being squeezed in the crisis countries - and pushed up in Germany. This German recovery has also been a bit more consumption-led than in the past.

Economists at Commerzbank reckon that Irish unit labour costs, at the start of 2009, had risen about 23% faster than the Eurozone average since the start of the euro.

graph

The gap now is about 8%. Spain went into this period with unit labour costs that had grown 10% faster than the average - that has also more than halved since 2009.

You can point to similar progress in Portugal and Greece. The only country that has not really made up the ground it had lost is Italy.

German labour costs were kept broadly flat during the 2009-10 ( it's one of the factors that kept their employment so stable during the recession).

But there are signs that they are now creeping up - notably, in that 4.3% pay deal for the IG Metall union last weekend, which covers more than 3 million workers and sets the tone for a lot of others.

If that continues, Commerzbank reckons the periphery could rebuild their competitiveness vis a vis Germany by 2015 - two years earlier than if German costs remain flat.

graph

Other estimates suggest that a 4% inflation rate in Germany would allow the ECB to stick to its 2% target for the Eurozone as a whole, but save the periphery from outright deflation.

That may not be politically feasible. But of course, things would be easier still for the south if Germany's recovery continued to be driven by consumption, as well as the traditional exports.

All of these parts of a slow-burn solution to the economic piece of the crisis are actually happening - however dark the headlines.

The problem is they are happening too slowly for financial markets - and they are happening with too little growth, especially in the periphery, for ordinary people to see any light at the tunnel, and for these countries' debt dynamics to start looking remotely sustainable.

Reason enough for politicians to keep searching for that elusive quick fix.

 
Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

So it's goodbye from me

After 11 years at the BBC, I'm leaving for a new role in the City.

Read full article

Comments

This entry is now closed for comments

Jump to comments pagination
 
  • rate this
    0

    Comment number 178.

    It took a Civil War to help create a United States of America. Politicians created the EU & Eurozone. Idealism without economic foundation - just politicians. Not much chance for growth until decisions can be made quickly to prevent massive debts from increasing.

  • rate this
    0

    Comment number 177.

    174 sjov

    You currently elect MEP's

    Agreed non-elected non accountable decisions makers does not work.

  • rate this
    0

    Comment number 176.

    Its the inability of Eurozone leaders to deal with the Greek problem & the time its taking thats causing such a shattering affect on confidence in the Euro Zone. Even the resource economies booming during the financial crisis now look like they maybe affected together with China. Bad judgement rather than bad debts & lack of decision making can go on until Germany's economy finally collapses.

  • rate this
    0

    Comment number 175.

    Any system which puts Ministers above democratically elected Parliament is bound to fail due to greed/ corruption/ vested interests of the politicians involved.
    The Euro and the EZ will eventually cease to be just like the Roman Empire many years ago and for the same reasons.
    When I see bureaucrats take a pay cut then I'll believe they're serious.

  • rate this
    +1

    Comment number 174.

    164.Happyineuroland ; Do the populous have a say on a federal Europe or will it be decision taken by our autocratic unelected leaders Von Rumpy and Boringsoo?
    171.John_from_Hendon ; No mention of the billions wasted on Brown/Blair's PPP-PFI projects I notice. Socialists can NEVER be trusted with the Electorates money.

 

Comments 5 of 178

 

Features

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.