Euro Zone Growth and German Dominance


18/11/2013

The 17 countries in the euro zone always look to their developed countries like Germany and France to guide them through the current phases of recession. They can push their economic growth by strengthening their internal economy to produce goods and services for the rest of the world and build big trade surplus. But this sadly is not happening in the euro zone because their big brother Germany is dominating them through their economic efficiency. The German economy is competitive with record low unemployment. Germany has deregulated labour market with highly exploitative employment practices. It is one of the few European countries that doesn’t have a minimum federal wage.

Unfortunately the other euro zone countries especially the peripheral ones are complaining about the Germans stealing away their market share. Germany has a very huge trade surplus and the other countries are feeling that they are not getting share of the pie. Economic efficiency, relatively lower cost of production and reduced welfare benefits to their citizens are some of the reasons for their success. Germany feels that their economic model will sooner or later set off growth and prosperity all over Europe. Germany always shares its bounty in bailing out the debt stricken economies of Southern Europe.

The US deeply upset about the German’s policy and their success. They believe that Germany will eventually control the entire Europe and this may be a threat to the US dominance. Will it? The time will tell.

The role of European Central Bank (ECB) needs to be watched. It is supposed to keep inflation close to 2 percent. Right now in many euro zone countries the inflation rate is close to zero. This is basically deflation, countries which have high debt levels like Greece, Spain will face nasty side effects due to this deflation.

Currently the rate of inflation is falling below target. Instead of reaching the target level of 2%, the consumer price rose only 0.7 percent while core prices that exclude volatile food and energy costs rose only 0.8 percent. For euro zone to remain stable economically the ECB must act proactively. Last week it lowered the lending rate by 25 basis point. Will it do the trick? Keep watching.

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