Eurozone’s north-south split

This is my comment from the latest Fund Strategy.

The eurozone may yet stave off collapse but it is not the institution it used to be.

In the first decade of the eurozone’s existence it more-or-less operated as a unified monetary bloc. Although differences between national economies remained they were kept at bay.

But since the emergence of the Greek crisis at the end of 2009, and even more so since the announcement of the €750 billion (£643 billion) stabilisation package in May, the eurozone has split. A two-tier eurozone has emerged with the southern European periphery (AKA the “Pigs”, “Club Med” or the “Olive Belt”) diverging from the fiscally tighter northern European core nations.

The markets are treating the two sets of nations in different ways. Those of southern Europe are having to pay a significantly higher amount for their credit than their northern counterparts.

European Central Bank (ECB) board members are also sniping at each other in semi-public squabbles. Germany has let it be known that it wants tougher fiscal discipline while the southern European nations want less harsh austerity.

There are even signs of a rift emerging in the eurozone core. Last week spreads between French government bonds and German bunds started to widen. This seemed to reflect perceptions that France’s public finances are in a poorer state than Germany’s.

Underlying all these problems is the difficulty of running a monetary bloc consisting of different national economies. Not only are there differences in the fiscal strength of the nations there are variations in their economic competitiveness. Yet all eurozone countries are – or more accurately were – supposed to share the same interest rates and the same currency.

These particular tensions would not have emerged if Europe was a true federal state or alternatively if it consisted of independent nation states. Trying to sit somewhere between the two is inherently unstable.

With the benefit of hindsight the eurozone has only lasted so long because of the relatively stable global economy over most of the past decade. The more that fundamental economic problems emerge the more difficult it will be for the eurozone to maintain itself as a unified monetary bloc.