German Chancellor Olaf Scholz gestures after addressing the Bundestag, in Berlin, ahead of a no-confidence vote against himself, on Dec. 16.TOBIAS SCHWARZ/AFP/Getty Images
A little more than a dozen years ago, Athens was overwhelmed by mass anti-austerity protests that sometimes turned violent. Clouds of tear gas often filled Syntagma Square in front of the parliament building, sending tens of thousands of protesters stampeding into the surrounding streets. On one night in February, 2012, some 45 buildings were torched by rioters. The flames made the city centre look like it had been hit by napalm.
A couple of years later, Greece was on the verge of leaving the euro zone, and Germany, the European Union’s ruthless fiscal enforcer, seemed to be encouraging “Grexit.” The other countries on the EU’s Mediterranean fringe, notably Italy, Spain and Portugal, were also suffering from crippling sovereign borrowing costs. If economies as large as Italy and Spain had gone bankrupt, the EU would have shattered like a crystal vase dropped onto a travertine tile floor.
Today, the picture is essentially reversing itself. It is the EU’s southern countries, especially Spain and Greece, that have emerged from the economic and financial hell zones, though their turnarounds were slow and often painful. Today, their economic growth rates are fairly strong – Spain’s economy is on fire – and their borrowing costs have plummeted. Germany and France are in political chaos. Germany, whose bickering coalition government collapsed last month, is on the verge of recession and might be in one already. At best, Europe’s biggest economy is stagnating, and the expected barrage of U.S. tariffs on EU imports, from BMWs to chemicals, could rob it of growth for years to come.
You can forgive the Mediterranean countries for their Schadenfreude moment. Germany, the old disciplinarian, needs to smarten up after years of economic mismanagement under the governments of chancellor Angela Merkel and her successor Olaf Scholz.
Among the southern countries, it is Spain’s economy that impresses most. Its GDP is expected to expand by 3 per cent this year, almost four times faster than the euro zone average. Its tourism industry is surging, and its population, unlike Italy’s, is rising, thanks largely to immigration. Spain is attracting big-bang investments and just nailed a €4.1-billion ($6.1-billion) commitment from Stellantis, the world’s fourth-largest automaker, and China’s CATL battery giant to build a battery plant in Spain’s northeast.
The yield on 10-year Spanish government bonds is 3 per cent, only 70 basis points north of Germany’s. France’s debt is more expensive than Spain’s. In 2012, at the peak of the euro zone crisis, the Spanish yield was almost 7 per cent, and its banking system had to be bailed out.
Greece’s rebound is not as compelling as Spain’s, but there is no doubt the worst is over. Its GDP is expected to grow this year by 2.2 per cent, and the primary surplus is fairly strong (a surplus is where government revenue exceeds non-interest spending). Public debt as a percentage of GDP is falling, and Greek bond yields on Friday were only slightly higher than France’s, a remarkable achievement given that, nine years ago, Greece defaulted on a payment to the International Monetary Fund. The country still has lots of catching up to do. Measured by GDP per capita at purchasing power parity, Greece is the second-poorest country in the EU, ahead of only Bulgaria. In 2009, before it got hammered by the debt crisis, Greece’s per-capita GDP was close to the EU average.
Germany is now the EU’s problem child.
Its fundamental problem is debt, though not in a Greek sense. While Greece spent too much money, living way beyond its means in the precrisis party era, Germany spent way too little – and made a false virtue of it. There is debt and then there is debt. Spending on giveaways to buy votes – Justin Trudeau’s GST cheques come to mind – does nothing to improve an economy’s efficiency and productivity; spending on innovation and infrastructure, from bridges and high-speed trains to digital networks and energy efficiency, does.
Germany is allergic to debt. Its “debt brake” constitutional amendment, adopted in 2009 by the Merkel government, limits deficit spending to 0.35 per cent of GDP, except in emergencies such as the COVID-19 crisis. So the country spent little on fixing itself up when it could have done so cheaply, since its borrowing costs are low by European standards.
It compounded its shabby investment strategy problem by going whole hog on cheap Russian natural gas. Coddling Moscow worked until Russia’s full-scale invasion of Ukraine in 2022. The Kremlin turned off the gas flows to Germany in retaliation for Berlin’s support of Ukraine. Energy prices soared, and some factories closed. There is no doubt high energy prices are partly behind the rapid retrenchment of Germany’s auto industry.
The energy crisis was compounded by the borderline-insane decision, taken under the Merkel regime, to close the country’s fleet of nuclear power plants, even though they were fairly modern and had never suffered major breakdowns or accidents. Then there was the overreliance on one market, China, which is no longer consuming German products such as cars like it used to.
Add it all up and Germany is in a mess, predictably so, and is the author of its own misfortunes. The EU’s southern fringe, once dismissed as the “peripheral” economies, where EU subsidies went to die, are now doing a credible job of underpinning the whole EU show. Nice reversal.
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Publish date : 2024-12-20 07:43:00
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