Currency union: the variance between bond interest-rates in Greece and Germany

24th January 2012

Today has opened with news which hits on a very familiar theme and it is one of the main consequences of the falwer nature of the Euro project. One may call it lack of competitiveness in Southern Europe or you can call it two-speed Europe although actually it has been showing signs of splitting even further. This, of course, is a long way from the economic convergence dreams (which frankly always had an element of fantasy about them) of the original Euro architects.

Today's data

Let us first have some relatively good news.

"The Markit Eurozone Purchasing Managers Index Composite Output Index moved into positive territory for the first time in five months in January, according to the preliminary ‘flash' reading which is based on around 85% of usual monthly replies. The index rose for the third month running, up from 48.3 in December to a five-month high of 50.4."

So as the benchmark here is 50 we have seen both an improvement and a little actual growth if this index is accurate. We need it,mind you, as its past numbers suggest this for the Euro zone overall in the last quarter of 2011.

"a 0.5- 0.6% contraction in gross domestic product in the final quarter of last year"

Several speed Euro zone

However we also get specific numbers from Germany and when we look at them we see where most of the increase has come from.

"The seasonally adjusted Markit Flash Germany Composite Output Index rose from 51.3 in December to 54.0, and thereby signalled the strongest pace of expansion since June 2011."

This leads to an inevitable consequence or punch line as follows.

"In contrast, output continued to fall across the rest of the region as a whole, dropping for the eighth successive month."

Actually there was some growth in France which registered 50.9 on this index so we have a three speed Euro zone indicated.


In the end economic divergence on this scale was always likely to prove a serious problem for the Euro zone. Whilst the figures above are preliminary estimates for one month they do fit with what has happened over the life of the Euro.There is a potential solution which is regional policy on a grand scale. However the grand scale required is indicated by the fact that even such moves as the Common Agricultural Policy and Common Fisheries Policy which were implicit regional policies have proved far too small even when added to the explicit regional policies.

What could not be accurately predicted was how this would play out. However we now know that a lack of economic convergence will lead to a shake-up of the Euro zone and maybe the departure of some members of it.

I have raised this issue today as in the melee of can kicking it is easy to forget that all the kicking of the poor battered can into the future has done nothing about the fundamental problem described above. Indeed, Euro zone policy reminds me of the policy of one of Charles Dickens most famous characters.

"Something will turn up"

So far it hasn't!

The divergence between bond interest-rates in Greece and Germany

Read more…


More from Mindful Money: 

The aims and failures of the eurozone

Greek debt deal rejected by Eurozone

Are demographics at the heart of the Eurozone crisis?

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