The emergence of a two-speed euro zone?

The Economist reports on good news from Germany:

THE machine that sputtered badly during the slump in world trade is now firing on all cylinders. Figures released on August 13th showed that the German economy grew by 2.2% (an annualised rate of close to 9%) in the three months to the end of June, well above even the most optimistic forecasts. The German figures, the best since reunification almost two decades ago, meant that the euro-area economy had a good quarter, too. GDP in the 16-country block rose at an annualised rate of 4%—much faster than in America and only a bit shy of surprisingly strong growth figures in Britain.

While this seems like good news to many, it seems like bad news to some. Why? The euro zone might be in the aftermath of an asymmetric shock, which the countries in the periphery (formerly known as the PIIGS) have suffered. Consumption in those countries is weak, and the growth rates predicted by Eurostat for 2010 are low:

• Portugal: 0.5
• Ireland: -0.9
• Italy: 0.8
• Greece: -3.0
• Spain: -0.4

Compared to those of Germany (1.2), Denmark (1.6) or France (1.3) we might see a permanent split between the biggest net-exporter Germany and its neighbours and the countries of the periphery. Of course, having growth in Germany is good news – but the news we want to hear is that the countries in the periphery grow strong(er) in order to pay off their debts – not only those of governments, but also those of the private sector where billions of euros have been sunk in real estate that are not easy to recover when prices are falling.

One interest rate for many countries works as long as the business cycles of those countries are synchronized. If that is no longer the case, the future of the euro zone looks bleak. Of course, political interference in the financial market can hold up the adjustment via default. However, the problem will only go away if the countries in the periphery start growing again. If they don’t, the problem will come up sometime somewhere in the financial arena. It might be surfacing slowly and painfully, or through a sudden stop, like a bank run or a government defaulting on its debt.