European Economy's Bleak Outlook

Briton Ryle

Updated April 3, 2013

Membership may have it privileges, but it also has its costs. For those countries that use the euro, the costs are the harshest they have ever been.

“The eurozone’s economy is forecast to contract 0.3% in 2013, according to the European Commission, the executive arm of the EU,” reports USA Today. “A closely-watched survey released Tuesday indicated that the recession is likely to have continued in the first quarter.”

The eurozone, comprised of 17 European nations, all of whom use the euro, is smaller than the EU, which is comprised of 27 nations.

You might think that since Europe’s most developed nations use the euro — including Germany, France, Italy, Austria, and many more — membership in the euro-currency-club would give the eurozone an advantage over the EU. After all, the EU includes all those smaller less-developed eastern-block nations who do not use the common currency.

But the truth is that the smaller eurozone club of nations is faring worse than the larger EU as a whole, making the euro’s future as a common currency more and more uncertain.

Record Unemployment

“For the 27-country European Union,” USA Today announced, “the unemployment rate was 10.9%.” While “official figures Tuesday showed that unemployment across the 17 European Union countries that use the euro has reached 12% for the first time since the currency was launched in 1999,” the newspaper compares.

Cracked Euro SidebarFebruary unemployment reports showed that over 19 million eurozone citizens are out of work, increasing by 2 million over the previous year. At the two extremes of the unemployment spectrum we find Germany at one end with a mere 5.7% unemployment rate, better even than the U.S.’s 7.7%, and Greece and Spain at the other end with a whopping 26.4% and 26.3% respectively.

Laszlo Andor, EU Employment Commissioner, is alarmed by the figures. “Such unacceptably high levels of unemployment are a tragedy for Europe and a signal of how serious a crisis some eurozone countries are now in,” quotes USA Today.

Though the recent crisis in Cyprus has seemingly stabilized, the island nation’s woes are far from over. In fact, over the next few months many are expecting Cyprus’ unemployment figures to reach higher than Greece’s.

Even though the crises in Italy, Spain, Portugal, Ireland, and Greece are similarly being contained, it is becoming more and more evident that membership into the eurozone club has its inequalities, which many are blaming on recent austerity measures.

“The eurozone economy sank back into recession as many governments in the region enacted big spending cuts and tax increases to get a handle on their public finances,” notes USA Today.

Yet efforts to bring fiscal balance sheets under control by cutting spending and raising taxes are crippling the industrial output of the very countries who are in greatest need of industrial growth, or as Reuters describes it, “Everywhere else [in the eurozone], the industrial rot extended.”

“Spanish manufacturing declined at its fastest pace since October,” and “in France, factory activity retreated for a 13th month,” Reuters added.  And for the entire eurozone as a whole, “Markit’s Eurozone Manufacturing PMI fell in March to 46.8 from 47.9 in February … extending its [contraction] for a 20th month.”

By far the eurozone’s most productive economy is Germany’s, “buoyed by solid finances, roaring exports and low unemployment,” a separate Reuters article headlined.

Germany Supports the Eurozone

For her part, Germany is lending very generously to her less fortunate eurozone members. Yet she is doing more than just handing out bailouts; she is also handing out free lessons on how to get their economies in ship-shape condition.

“German policymakers have taken to their new found status with something close to gusto,” notes Simon Tilford, chief economist at the Centre for European Reform, as quoted by Reuters. “They routinely tell other euro zone countries how to run their economies, citing Germany as a model for the currency union as a whole.”

Not long ago, during the 1990’s and early 2000’s, Germany was going through tough economic times of her own. Once plagued by high government expenditures and generous unemployment benefits, Germany now runs a tighter ship, having dramatically increased its competitiveness by reducing spending and letting wages find their own price levels according to each region’s labor supply and demand, rather than implementing a nation-wide minimum wage.

The message that Germany’s Chancellor Merkel is trying to get to the rest of the eurozone is that “high deficits are bad for growth,” Reuters quotes. But are Germany’s demands on her teetering companions too weighty for them to burden?

Perhaps Germany fails to recognize the great stroke of luck that aided her turn-around those 20 years ago. The nation enjoyed a tremendous advantage when East and West Germany reunified, as an already flourishing West German industrial sector suddenly gained access to a dirt-cheap East German labour market. It was no wonder that in as little as a decade after reunification, Germany began dominating Europe as a lean, mean production machine, very competitive to foreign buyers. Nor is it any wonder that today Merkel refuses to hear any talk of a national minimum wage, thereby keeping Germany’s workers among the lowest paid in the eurozone.

Yet exporting Germany’s 20-year-old reforms to other European nations today has created a great deal of resentment and even resistance. “There are three risks with her strategy,” Reuters outlines, “[1] that the economic policy that worked for frugal Germany may not work for Europe, [2] that a country unable to cope with tough bailout programs may default, and [3] that southern Europeans may rebel against mainstream parties and vote in anti-austerity governments.”

Just note which countries Germany is trying to force her frugality on… First there is Greece, which has one of the lowest retirement ages in the world with very generous pensions. Then there are the southern nations from Portugal, through Spain, southern France, Italy, and ultimately into Greece again, which still close down shops and offices for a few hours every mid-day for siesta.

These are nations that do not share Germany’s ultra-high-productivity mind-set. It will take a long time and a tough struggle to get many of those populations to forgo so many of the benefits and comforts they have grown accustomed to for decades.

Going forward, we can expect the arguing to heat up and political cohesion to show signs of cracking under the strain. “Since the Germans are the main bailout contributors and have most to lose in any collapse of monetary union,” supports Reuters, “they must ensure that their partners cut their deficits, implement reforms and avoid mistakes that could sink the euro.”

The pay-back that Germany gets from cramming their austerity demands down the throats of their fellow eurozone membership may not be what Germany expects. “There is a strong prospect that a backlash against German-driven austerity policies will fill the European Parliament next year with a bumper crop of Eurosceptics and political radicals,” Reuters warns.

Although Germany has a vested interest in keeping the eurozone together &mdash namely, to get all her money back — many are those who doubt the membership’s survival. After all, raise the price of membership too high, and the costs will outweigh the privileges for those who cannot afford them.

Joseph Cafariello


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