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

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

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  • 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.

  • rate this
    0

    Comment number 173.

    166.Happyineuroland

    "The more I check the 1930's the more I see we are on the same road."

    Try the 1870's - a property/debt bubble crash - that took 30 years to resolve.

    or even the around 400 although economic data is a bit sparse from what I can see - I do admit! (But Not being a romanist myself I will bow to superior scholarship.)

  • rate this
    0

    Comment number 172.

    121.goenzoy
    10 Hours ago
    120.Charles Jurcich

    NONSENS Germany IS absolutly willed to do transfers but the key is what amounts/timeframe and what assets they get in RETURN.
    =
    So they are a 'banker' not a fellow state - that ain't a Union - the Euro is doomed if that is true - how many assets can Greece give?

  • rate this
    0

    Comment number 171.

    169. DA

    One of my colleagues is fond of reminding his children that when he had his first mortgage rates went up to 18%!

    We need a fair rate - in the previous 300 odd years lowest rate was 2.5% - we probably need 4% or 5% NOW.

    The fact that the BoE have so destroyed capitalism through their crass ignorance and have effective negative rates for their friends is the real calamity. = DEPRESSION!

  • rate this
    +1

    Comment number 170.

    160.Flybymike ; The Euro is doing fine Mike....are you from Mars by any chance?

  • rate this
    0

    Comment number 169.

    IF interest rates are required to be high for Capitalism to work, why
    a) Why are the tories reviled for 15% rates at ERM?
    b) How do Muslims work and prosper when levying interest is banned?

  • rate this
    +2

    Comment number 168.

    The bottom line is .. if you don't pay the workers enough the market fails. It is true here and it will be true in Asia/Chine. Lending them the money does not work in the long run. Look at wages v GDP over the past 20 years. Distribute the wealth or crash.

  • rate this
    0

    Comment number 167.

    79.Charles Jurcich
    ..at the point a bank is bailed out, it should also be nationalised - properly - and run by civil servants.
    =
    Not HMRC I hope, my mate took early retirement from there, if he is to be believed they are more useless than British Leyland - he was a VAT man, & when they merged he said Customs were shocked by the incompetence of the IR - & we give our money to them!

  • rate this
    0

    Comment number 166.

    As JFH says we have the opportunity to fix the problems, though I don't think those in power are up to the job, and there is to much desire to hang onto the status quo.

    The more I check the 1930's the more I see we are on the same road.

  • rate this
    0

    Comment number 165.

    Let Bankia go bust.

    Let Greece go bust and stay in the euro.

    We need a stable currency, continual borrowing and devalueing is not mathematically possible. Visit Zimbabwe.

    Loose the idea we all need to work, I ask what are machines for???

    Money/Currencies are irrelevent. Trade imbalances are.

    Europe still has the most purchasing power - use it wisely.

  • rate this
    0

    Comment number 164.

    MMM a lot of negative comments.
    Wealth is already transferred from richer to poorer countries within the EU.
    I believe we will be better of with a properly run federal europe, and this is what they are working towards.
    EU needs to open its book, and allow public inspection of everything.
    (Perhaps all accounts online).

    Divide and rule, China will gobble up all the worlds raw materials.

  • rate this
    0

    Comment number 163.

    For most western economies, to maintain and sustain our standard of living, it seems to be one or the other...
    DEBT or AUSTERITY.

    The consumer society relies on DEBT to continue.
    AUSTERITY leads to massive unemployment and poverty.
    So DEBT it must be.....keep kicking the can down the road.

    Except GERMANY who somehow has managed to avoid DEBT AND AUSTERITY....VG+ 5*****.

  • rate this
    0

    Comment number 162.

    159
    "Our best access to cash would be to export more than we import. We don't."

    Kind of a truism. But what is the solution with high local labour costs but high national cost of living. We can't compete with low eg.Chinese labour cost markets. So how do you redistribute wealth?

  • rate this
    +2

    Comment number 161.

    This is complete wishful thinking irrelevance apart from one hint at a true fact: that increased competitiveness without economic pie growth means decline for most and ascent for a few 'gold medalist performers'. On a finite planet it's long overdue that we think logically about sustainability especially consumption and population. Per capita true buying power economic growth is over.

  • rate this
    0

    Comment number 160.

    John_from_Hendon
    Thanks John. So I suppose the Euro isn't doing that bad for a new currency then

    Regards

  • rate this
    0

    Comment number 159.

    155 Aircraft

    What I wrote @127 & 114. EZ countries are where the UK would be, if we used (say) the US $. Our best access to cash would be to export more than we import. We don't. We'd have to borrow & fall into increasing debt. With the £, we can print more.

    That's why the positive balance of trade countries in the EZ (D, FIN, NL, A) are going well, while Greece, Spain, Portugal... are not.

 

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