Europe’s Core Begins to Look Like the Periphery
For most of the euro zone debt crisis, the distinction between the core and peripheral countries of the euro zone have been quite clear — the periphery seemed to cause all the trouble, and the core picked up the bill.
This is clearly overly simplistic, but it was the more indebted peripheral countrieslike Greece, Portugal and Ireland who had to be bailed out by the troika of the European Central Bank, (ECB), International Monetary Fund (IMF) and European Commission as their growth stalled.
And the core of Germany and France, with smaller economies like Finland and the Netherlands, looked as though they had to keep their unruly, boom-and-bust relations in line — while reaping the benefits for their exporters from a weaker euro .
Now the strain is starting to tell on the core countries too. On Tuesday, estimates of second-quarter growthfor Euroland are expected to show a fall of 0.2 percent for the euro zone as whole. Germany's GDP growth for the quarter was 0.3 percent, slightly higher than expected, while France's GDP did not grow at all in the quarter, better than the 0.1 percent fall which had been expected, it emerged on Tuesday.
Germany’s factory orders fell by an alarming 1.7 percent between May and June, much worse than the 0.8 percent forecast. If the euro zone’s biggest (and for much of the crisis its healthiest) economy is faltering, the situation could be even more critical than feared.
“In the good times, the euro encourages money to go from the core to the periphery, creating booms and busts. In the bad times, it encourages money to go the other way and increases the liabilities of the core,” Gerard Lyons, chief economist at Standard Chartered, told CNBC.com.
“The euro is a fundamentally flawed concept, and that’s why the core is facing greater challenges. The core can’t cut themselves off completely from the periphery and that’s what markets are responding to,” he said.
There is also an emerging “soft” core of countries like France and heavily indebted Belgium, a group of nations whose economies are not as robust as those of Germany. Nouriel Roubini, the economist best-known for predicting the 2008 financial crisis, highlighted the “soft” core earlier this year.
The recent emergence of an axis between Spain, Italy and France at the last euro zone leaders’ summit shows that the political fault lines between core and periphery are shifting too. The relationship between German Chancellor Angela Merkel and her French opposite number, Francois Hollande, does not appear to be as close as her relationship with his predecessor Nicolas Sarkozy.
“It’s still possible to differentiate between the core and periphery, but the question has always been: Where does France sit? Politically, it’s in the core, but economically in the periphery,” Lyons said.
The increasing blurring of boundaries between core and periphery could also have an effect on domestic politics in euro zone countries.
Tina Fordham, senior political analyst at Citi, has suggested that rising anti-bailout sentiment in the euro zone core countries could be likened to the emergence of the Tea Party as a political force in the U.S.
“History suggests that the collapse of the political center is a common feature of the aftermath of financial crises; in that sense, the political outlook for the mature democracies may not be a case of history repeating itself, but as has been famously said, it ‘rhymes’,” she said referring to the famous Mark Twain quote.
Italy, the euro zone’s third-largest economy, tipped as the next bailout candidate after Spain, has also often sat uncomfortably between core and periphery — roughly speaking, the north, home to most of the country’s manufacturing, is much more like a core country, while the poorer, tourism-dependent south is more like europe’s periphery.
One area of the market where the distinction is still clear is in the bond markets. Germany’s two-year bond yieldsare still close to their all-time low of less than zero (effectively meaning that investors are paying to lend them money) while Spain’s have continued to rise above 4 percent as it looked increasingly likely to opt for a bailout.
“This all comes down to one issue — which is that the euro has to change to survive. Not just by becoming a political union, but also a hard and soft euro for the core and periphery,” Lyons said.
“The reality is, no-one will go down that route unless forced to. It would require a complex, messy divide being drawn up now.”
Written by Catherine Boyle, CNBC. Twitter: @catboyle01