In the wake of Europe’s latest debt crisis, the eurozone could be diverging into two or even three different economic parts, a move that threatens to compound the problems even further.
Significant economic differences have always existed between the eurozone’s northern and southern countries. But some economists now believe that, intensified by the shocks of the financial crisis, multiple differences threaten the future of the euro itself.
“I don’t think it’s sustainable in the absence of a much greater degree of political and economic integration,” said Simon Tilford, chief economist at the Centre for European Reform, a research institute based in London.
After publication of new figures on Monday, a senior EU official acknowledged for the first time that a two-speed eurozone might be developing, with Germany racing ahead while debt-laden countries on the continent’s periphery battle stagnation.
“It has to be admitted, there is a certain dualism in Europe,” European Commissioner for Economic and Monetary Affairs Olli Rehn said on Monday while announcing the commission’s autumn economic forecasts.
Germany has “rebounded very forcefully from the financial crisis and economic recession with a strong growth of exports — increasingly spilling over to the domestic demand,” Rehn said.
Ireland and some countries in the south of Europe, in contrast, “have faced significant difficulties,” he said.
Adding to the complexity, other European officials say, is a third group of economies that includes France and Italy, which did not suffer as much during the recession because they were less reliant on global trade yet have not recovered as well even as trade has rebounded.
Financial markets gave a largely negative reaction Monday to the 85 billion euro (US$111.2 billion) bailout package for Ireland announced on Sunday night and to the announcement of new rules for dealing with debt crises in the eurozone after 2013. EU officials had hoped the Irish rescue, and greater clarity on future rescues, would quell market fears of crisis spreading to other heavily indebted euro countries, like Spain and Portugal.
After initial gains, European stocks retreated and investors continued to sell the bonds of Spain, Italy, Belgium and Portugal. The spread, or interest-rate differential, between Spanish and German 10-year bonds rose to the highest level since the creation of the euro in 1999. Wider spreads indicate that investors are seeking a higher yield to compensate for greater perceived risk.
Ben May, an economist in London with Capital Economics, said investors had been troubled by a sense that some policymakers were trying to discourage other governments from applying for bailouts. For example, he said, Ireland will be charged a rate of around 5.8 percent on its loans, compared with the 5 percent that Greece has to pay, and there were reports suggesting that Germany wanted the rate even higher.
“The further details of the Irish bailout package and the euro zone’s permanent crisis resolution mechanism confirm that Germany and other European hard-liners are in no mood to make major concessions to the periphery,” May wrote. “Accordingly, market stresses are unlikely to ease any time soon.”
Unlike Iceland, which pulled out of its debt crisis in part by devaluing its currency to increase exports, euro countries like Greece, Portugal and Ireland cannot use devaluation to stimulate growth. That makes their prospects for escaping a debt crisis look bleak because the cuts needed to control budget deficits also depress growth.