Decoupling – the idea that some countries prosper while others flounder – has entered a new phase. After slowly gaining credibility between 2005 and 2007, the term was swept aside by the jitters of 2008, reappearing in mid-2009. Now, a new word describes global economic developments: fragmentation. It has disturbing implications for the Eurozone.
Decoupling refers to asynchronous business cycles across regions – in other words, when one economy grows while another stumbles. Early in the 2000s, the US appeared to set the rhythm for the global economy. As its growth rate moved, whether up or down, so did that of the rest of the world. Late in 2007, signs of US weakness started to emerge.
At first, both Europe and Southeast Asia seemed immune to America’s woes and the concept of “decoupling” was born. The term’s usefulness quickly faded when the 2008 financial crisis taught us that we’re all in this together. The clear message of the crisis was the interconnectedness in the global economy. No major country could escape the shock waves from an extreme event in the world’s largest economy. But decoupling returned in 2009, applied first to Southeast Asia, led by China, then to the commodity- exporting countries, and finally to the other export-oriented countries.
Now, with the first half year of 2010 behind us, decoupling has reached a new level altogether. While US growth faltered in the second quarter, fuelling worries about a possible double-dip and prompting calls for more government stimulus, Germany grew at a rather astonishing annualized rate of 9%, almost outpacing China. What’s going on here?
Decoupling, it seems, has advanced to a stage perhaps better called “fragmentation.” First, decoupling took place between regions; now it is taking place within them. In the Eurozone, Germany is currently clearly the outlier, with some other northern European countries – for example, the Netherlands and Finland – also faring well. France and Italy have had decent, if not outstanding, growth, while Spain, Portugal, and especially Greece – the triggers of the European sovereign debt crisis – are in recession or very close to it.
Most economists agree that Germany’s remarkable second-quarter growth will not be matched in the second half of the year. Nevertheless, we think fragmentation will only increase, with some worrisome consequences. Germany’s growth is export-driven, as is the case in some other northern European countries. Meanwhile, in France, Italy and southern Europe as a whole, growth, however modest, has been much more domestically driven. This does not bode at all well for the future of the Eurozone. The larger the disparities, the more the tensions among the different members will grow, further exposing the impotence of the European Central Bank’s monetary policy.
Just imagine that Germany continues to post robust growth numbers through year-end, raising inflation pressures in Europe’s core. How will the ECB tackle this issue if, at the same time, Europe’s periphery is mired in recession or even depression?
As admirable as Germany’s growth might be, it could sow the seeds of deepening discontent in all of Europe.
No comments:
Post a Comment