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Waltzing with the Elephant: The Painful but Inevitable Convergence of Germany and the Euro-Periphery

Carlo Bastasin

Despite an incredibly severe global economic crisis, the number of unemployed people in Germany has been shrinking: in January 2005 unemployment rolls in Germany topped five million, and today they number less than three million. Recently the OECD forecasted that in the next two years Germany will again overcome China as the country with the world’s highest balance of payments surplus reaching 7.6 percent of GNP. For some eurozone countries, coping with Germany’s economic stellar performance is becoming as difficult as waltzing with an elephant.

As indexes of industrial production demonstrate (see the graph to the right), there is growing separation between the industrial output of Germany and other leading European producers (including Italy, the second largest manufacturer in the eurozone). In the last 18 months, the indexes have started to yawn, and France and Italy have shown increases 15 percent lower than the Germans. It is still too early to assess all the dynamics behind this trend, but the crisis seems to have strengthened the correlation between Germany and its closest trading partners outside the euro area. German exports to China have increased by 80 percent since 2007, and those to India by 40 percent, while the German-French trade volume remained unchanged, and that with Spain declined by 20 percent. The German economic cycle, driven by industrial exports, seems to be correlated to the global cycle more than to the euro cycle, as is logical for a country whose share of trade as a percentage of GDP is double the average of the G7 countries.

These developments are feeding into a feeling of scepticism about the future of the European Union. The debt crisis in the euro area is determined also by a sense of structural divergence between core and periphery countries. Furthermore, the political integration of the European Union had been built around the backbone of Franco-German trade. Now that the impulse driving German economic dynamism no longer comes from the West but from the East, some analysts are tempted to redraw the map. In this new map, Germany detaches from its European partners—with all their attendant problems—and turns alone towards the rest of the world.

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