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Is the gap in the euro-zone a threat for Europe?

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By Steve Scherer

April 9 (Bloomberg) — Elina Helmanen and Minas Megalokonomos embody a widening north-south divide that may put the euro region at more risk than the Greek budget does.

Helmanen, 26, lives on her own, studying politics in her native Finland while juggling a part-time job as a waitress. She expects to find a job after graduating next year.

“I believe that if you try hard enough and are ambitious enough, you can get what you want,” said Helmanen.

Megalokonomos is the same age and earned a degree in economics in 2007. He has yet to find work at home in Greece and lives with his parents in Athens.

“Unemployment and corruption go against any potential a hard-working person has,” he said.

Such diverging expectations show the gulf within the group of 16 countries sharing the euro. As growth prospects diminish in the south, the single currency may become an economic and political straightjacket, executives and analysts said.

Finland, Germany, France and the Netherlands are the euro area’s most competitive countries, according to the World Economic Forum’s competitiveness report for 2009. Greece, Italy, Portugal and Spain are the laggards. Measures to make them more productive could generate “popular discontent” that would ultimately push them from the union, said Stuart Thomson, chief economist at Ignis Asset Management in Glasgow, Scotland.

“It’s a massive problem for Europe because it means that a third of the euro zone is effectively in economic permafrost,” said Thomson, who helps oversee about $100 billion.

‘Threat for Europe’

The north-south divide has grown steadily since the introduction of the euro in 1999, except for a slight narrowing last year, according to the European Central Bank’s competitiveness index, which ranks competitiveness based on volume of imports and exports, adjusted for local prices.

“The gap between northern and southern euro-zone countries is really a threat for Europe,” said Harald Schrimpf, chief executive officer of Berlin-based software maker PSI AG, which employs 1,400 people. It has offices in 15 countries, including Poland and Russia, though none in southern Europe.

The single currency keeps members from devaluing their currencies to boost exports or attract tourists, as Italy did with the lira against the German mark five times between 1981 and 1985 and again in 1992.

Devaluations can no longer mask the corruption, rigid labor rules and higher corporate tax rates that the World Economic Forum rankings and Transparency International’s corruption index show are more prevalent among the southerners.

Market Turmoil

Greece’s current budget debacle has shown the limits of the euro’s ability to shield its members.

The yield spread between Greek and German bonds has more than tripled since August. It rose to its widest since the euro’s debut yesterday on concern Greece will have difficulty reducing a deficit that is now 12.9 percent of gross domestic product. Prime Minister George Papandreou has announced austerity measures that include cuts to public workers’ bonuses.

In the five-year credit default swap market, the buying and selling of insurance cover for debt, the average price for Italy, Spain and Portugal is about four times that of the four nations to the north. Greece, at 443 basis points yesterday, is more than 12 times the average; Finland’s cost is 24 basis points, according to prices from CMA DataVision.

No northern country’s benchmark stock index has risen by less than 36 percent during the past 12 months, while no southern index advanced by more than 35 percent. The worst was Greece’s ASE Index, up less than 7 percent. The best was the Helsinki 25 Index in Helmanen’s Finland, up 69 percent.

Productivity Question

“There now has to be a phase of reforms aimed at boosting productivity,” said Marco Valli, an economist in Milan at UniCredit SpA, Italy’s largest bank. “The markets may forgive one error, but if no changes are made in the euro zone and another crisis comes around, it could be different.”

Northern workers produce more in less time, according to the Organization for Economic Cooperation and Development.

The four northern countries produced an average of $50.85 per hour worked, adjusted for purchasing parity. The average for the four southern countries was $35.80. The gap has widened since the introduction of the euro in 1999.

The euro also has made exports from southern countries “overpriced,” said Fredrik Erixon, director of the European Centre for International Political Economy in Brussels.

“Greece should be seen as an alarm bell for the rest of southern Europe,” Erixon said. Southern European countries “can take a holiday from reality for a while, but ultimately the crisis is going to come.”

Jobless, Growth

The gap isn’t evident in unemployment rates, which are similar: Joblessness in Finland was 9.2 percent in February, compared with 10.3 percent in Greece, according to the national statistics offices.

Growth rates, though, diverge. The four southern countries combined will shrink 0.4 percent this year and gain 1 percent in 2011, compared with growth of almost 1.1 percent and 1.6 percent for the four in the northern group, according to the European Commission and the Greek government.

Franco Scanagatta, chief executive officer of motorcycle- gear maker Dainese SpA in Molvena, Italy, is eliminating less popular products and laying off 80 workers. The difficulties at Dainese, which produces leather racing suits and helmets for MotoGP world champion Valentino Rossi, are about Italy’s declining competitiveness, Scanagatta said.


“There’s systemic inefficiency in the public administration, infrastructure and in union relations,” said Scanagatta. “It’s a handicap compared with other nations.”

Finland, Germany and the Netherlands are among the 10 most competitive countries in the world, while France, Austria and Belgium are in the top 20, according to the World Economic Forum Global Competitiveness Report, which ranks 133 nations using a composite of 110 measurements.

Spain is No. 33 after Brunei, Portugal No. 43 after Oman and Puerto Rico and Italy No. 48 after Slovakia. Greece comes in at No. 71 after Colombia and Egypt. The index takes into account labor rules and tax rates as well as the quality of a country’s infrastructure and educational systems.

Megalokonomos said a favor from a government official or relative is crucial to finding a decent job in Greece.

Berlin-based Transparency International’s 2009 Corruption Perceptions Index places Greece 71st in its rankings, tied with Romania. Finland is the sixth-most transparent country in the world, along with the Netherlands.

“If there are no drastic changes in the mentality of the Greek people then I think there will be tougher times,” said Megalokonomos, who supplemented parental financial support while he was getting his degree from Boston University by working at the radiology unit of the medical center there.

Finland’s primary-education system is the world’s best and higher education is fourth, while Greece is ranked 65 and 90 respectively, the World Economic Forum says.

Helmanen, who studies at the University of Turku, agreed that connections can be helpful. Nonetheless, she said: “Even if the economy isn’t good, I still believe I can make my dreams come true.”