From Socialist Voice, April 2011

A tale of two Europes

We now have a tale of two Europes. Germany’s economic might is crushing the weak peripheral countries of Ireland, Spain, Portugal, and Greece. This is clear by virtue of the European Central Bank’s decision in the first week of April to raise interest rates in the euro zone from 1 to 1¼ per cent.
     This action essentially accedes to Germany’s desire for higher interest rates. It will do little to help the weakest and instead will simply service the strongest. Actions of this sort, rather than serving to curb inflation—running at 2.6 per cent—signal the real beginnings of Europe shooting itself in its collective foot and sliding further into disorder and fragmentation.
     The only reason interest rates need to rise is because Germany’s economic output—bigger than the four peripheral countries put together—is growing at such a steady rate. Germany has been powering out of recession over the past two years. Its economy grew by 3.7 per cent last year, while industrial production grew by 15 per cent.
     Labour costs in this period have remained flat—indeed Germany has made itself hyper-competitive largely through labour market reforms and passing significant pressures on to the factory floor. Germany has squeezed its own workers and kept wages practically frozen for the past decade. As a result, it has chalked up large current-account surpluses.
     However, one half of the euro zone has no economic growth whatsoever. Over the past two years, under pressure from the ECB, the Greek economy has shrunk by 6 per cent and Ireland’s by 11 per cent; and while Portugal’s grew by 0.3 per cent over the same period, it is expected to shrink by 1.3 per cent this year.
     These countries are in penury and need the ECB’s interest rate increase like a hole in the head. The German success is directly linked to the suffering of the weakest countries. What is becoming even more obvious is that we have a two-speed Europe, trapped inside a central currency with big problems.
     The German success is a problem because they are outcompeting countries in the European Union that need to grow. This problem is aggravated by the fact that the countries are locked together in a currency union, which is serving only to favour Germany. In this way Germany has had a lot of help from an undervalued currency, while the periphery has been subject to an overvalued currency. Germany has in many respects had artificial growth and competitiveness at the expense of the poorer countries.
     The euro zone has therefore become a trap for peripheral countries. They are crushed by debt, unable to compete against the core, saddled with austerity, and facing long-term stagnation. In all probability “austerity fatigue” is likely to set in, as populist demands arise in opposition to servicing debts to foreigners rather than servicing education and health.
     It is highly probable that a number of member-states will be forced, by popular pressure, to leave the currency union within the next few years, leaving the euro to survive solely in the core countries.
     Defaulting and reconsidering membership of the euro will become all the more likely in the next few years. The left needs to play a central part in shaping up to this likely outcome.

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