Summer is almost over in the northern hemisphere and with the return of the cold weather comes the return of economic problems. Recent economic data suggest that despite wide government optimism in the EU, the teetering economic bloc still can’t find its feet.
The issue fundamentally rests on the problems associated with the currency union and various intractable constraints of geography, say two Europe watchers.
Early in September, Spain released employment figures showing increased unemployment during the July to August period and shrinking employment. Spain’s employment was steady for six months until its dip in July.
Italy registered poor figures as well. For every company created in Italy, two close down, new data from business association Confesercenti shows. More disturbingly, by June this year more than 40% of businesses created since 2010 have already disappeared.
France also said in September that its unemployment levels will not decrease this year as expected and will only see slight growth. Germany is also showing signs of lower growth in the final months of 2014. The economic sanctions imposed on Russia by the EU are suspected to have a long term effect on the German economy, much more than predicted.
Germany and its northern allies remain opposed to anything resembling a fiscal bailout of the troubled southern periphery. Germany relies on the return of economic growth to ease increasing pressure on its economy and could soon support additional measures including quantitative easing.
New Zealand Initiative director Oliver Hartwich says Germany has probably benefited from the crisis through lower interest rates without actually spending anything directly on bailing out other countries.
“It will be interesting to see whether they have to put out some hard cash. That will probably change the political dynamic in Germany. But so far it’s been a pretty good crisis for Germany.
“On the other hand, exports to other eurozone members has actually declined in relative terms. Germany has actually seen its biggest export successes in dealing with non-EU countries. China is a good example,” he says.
The role that the EU plays for German exports, Mr Hartwich says, is probably overestimated.
“The common market is great, they should try to keep it at all costs but having a monetary union is not necessary to make it work. Germany’s in a really strange position and they’re starting to lose their last friends.
“They have no natural allies anymore because most countries actually follow the French initiative to make things more flexible and give up more austerity.”
New Zealand Business Forum director Stephen Jacobi says the underlying problems for the supranational bloc come back to the currency union. The EU cannot seem to agree how the monetary union will operate.
“Some people stayed outside [the eurozone], while others were allowed in. Maybe moving to currency union was too early because they should have taken some more time to sort things out. I think those were the problems.
“I think a currency union is the inevitable consequence of a single market and the free movement of goods and services. The difficulty was that they didn’t do it too soon, it’s that they didn’t do it together.
“They did it in a way that probably didn’t allow for the different competitiveness of the various parts of the EU. So the difference between Greece and Germany is enormous in terms of competitiveness and the system that they adopted allowed no way for them to address those fundamental issues.
“And stuck in a crisis such as Greece got itself into it was unable to trade its way out of it because it had no monetary means at its disposal to do so,” Mr Jacobi says.
Mr Hartwich says the European peninsula was never an ideal place to set up a currency union.
“The countries were way too different. There were business markets that were not in sync, productivity levels were different. If you look at the experiences of European countries prior to the introduction of the Euro you can see some countries regularly devalued their currencies.
“Germany typically appreciated it. That made up for different movements in productivity. Once they introduced the EU monetary union that became no longer possible. The result is what we are now seeing,” he says.
One answer is to go back to national currencies or split the Euro into two or three sub-blocs. The only question is where would France fit? Mr Hartwich says although it lies on the North European Plain, by its economic fundamentals that’s not where it belongs.
“Many people have been quite against the splitting of Germany and France, but I would argue that it’s not the proposal that’s driving Germany and France apart it’s actually the currency itself that is doing the job.
“That’s actually the tragedy of the European Union. The Union before the introduction of the Euro actually achieved quite a wonderful job, facilitating trade, exchange, freedom of movement and so on. It was a colourful continent and it was working quite well and was a relatively good economic environment.
“What I find tragic about the whole European project is that the introduction of the Euro which was meant to culminate and bring everything together is now destroying the whole project by revitalising some national animosities and turning former friends into the enemies they once were. By trying to perfect and complete the model they are destroying it,” Mr Hartwich says.