Divergent Europe: Coming apart at the seams

Brian Sturgess - May 2013

Speed Read
  • The economic performance of Germany and France, Italy and Spain has diverged since the financial crisis of 2008.
  • Stronger German growth is reflected in GDP numbers, relative unemployment rates, large differences in the cost of credit and in consumer confidence.
  • The economic division within the Eurozone is widened by trade and government account surpluses in Germany and deficits in France, Spain and Italy.
  • These economic imbalances cannot be resolved automatically within the constraint of a single currency without central control over fiscal deficits or a convergence of GDP growth rates.

Germany uncouples from its partners

One issue that needs to be addressed within the Eurozone is the growing economic imbalances in GDP growth between the main member countries. The process of economic convergence of the four main economies driving the Eurozone has weakened significantly in the aftermath of the financial crisis of 2008.  These countries accounted for 77% of Eurozone GDP in 2012.

The data in Chart 1 shows that the German economy recovered far more rapidly than France, Italy and Spain from the effects of the financial crisis as measured by real GDP.


These economic performance differences are reflected in unemployment data. Unemployment as a percentage of the total labour force in Spain stood at an extremely high level of 26.7% in March 2013 compared with levels of 11.0% in France and 11.5% in Italy, while in Germany only 5.4% of workers were without work. [1] The poor relative economic performance of Spain, Italy and France compared to Germany is also demonstrated in much higher levels of youth unemployment with rates compared to all adults. This is shown in Chart 2.



Data from the European Central Bank (ECB) also shows that businesses face a divided Europe in the cost of finance.  [2] In the first quarter of 2012, the most recent data, the ECB reported that the average cost of a loan up to €250,000 in Germany was 4.1% per annum compared with 5.9% in Italy and 5.4% in Spain.


The differences in economic performance among the main Eurozone economies are reflected in the relative confidence of domestic consumers. A monthly panel shows (see Chart 3) that only 4% of Italian, 5% of Spanish and 6% of French consumers thought that the economic situation was good in March 2013 compared with 64% of Germans surveyed.


Fundamental Imbalances

There are other large economic imbalances across the Eurozone. Germany’s export led recovery out of the financial crisis means that the country has been running a large current account surplus averaging 6.3% of GDP over the period 2009-2012. Strong GDP growth and control over public expenditure has also resulted in a turnaround in German public finances which have gone from a government deficit of 3.1% of GDP in 2009 to a small surplus of 0.2% in 2012. In sharp contrast Chart 4 shows that last year, the French, Spanish and Italian economies all experienced twin deficits on both trade and government accounts. In the case of Spain the government deficit as a proportion of GDP in 2012 was 10.6% only a little less than in 2009, while although Italy and France have brought down their government deficits, the current balance of trade has changed little over the last four years. Spain has only brought down the balance of trade deficit through depressed consumer demand.



Europe’s pain- Germany’s gain

Further evidence of the differences in economic conditions across the Eurozone is given by the disparities that exist in the prices of a similar basket of consumer goods as shown in the World Price Index which has been calculated by World Economics for over two years. The most recent figures for April 2013 suggest that the price level in France is 24% higher than in Germany meaning that a euro in Germany is worth relatively more in purchasing power, but a significant difference has existed for several years. [3] This means that for German citizens the euro’s value against the dollar is less than for French ones. This may be a nuisance for tourists, but it is a bonus for German exporters and helps maintain the country’s current account surplus while underpinning relatively stronger GDP growth.


Addressing economic imbalances is not easy within the framework of the single currency. Trade imbalances cannot be corrected through differential exchange rate movements leaving only internal deflation and improved competitiveness in France, Italy and Spain or inflation in Germany as difficult or politically unwelcome solutions. The inflexibilities of the European currency union make imbalances hard to correct, but what is less well known is the sheer scale of the adjustments needed to prevent the Eurozone coming apart at the seams.