Hermes warns on eurozone burden facing Germany

Germany is unquestionably the eurozone’s main winner last year, but burdens on it will only increase until disparities between the region’s nations are “dramatically reduced”, says Hermes Fund Managers.

Neil Williams, Hermes’ chief economist for global government and inflation bonds, said disparities exist between Germany and its neighbours in unemployment, overall competitiveness and unit labour costs.

“A risk for 2011 is that less competitive countries will place increasing constraints on the countries trying to fund them, predominantly Germany,” he said.

German GDP growth of 3.6% last year – the strongest since reunification – and “low and stable” unemployment of 7.5% placed Europe’s largest economy “in stark contrast” to the satellite countries, he added.

“Whether or not these members can undertake the cost adjustment necessary will be a deciding factor in boosting their competitiveness. Without reform further polarisation among eurozone members looks inevitable.”

He said eurozone competitiveness suffered as its unit labour costs rose 20% relative to its trading partners since the euro’s introduction. US labour costs fell 37%, while Britain’s dropped 6%.

Germany had undergone “painful adjustment” to remain competitive shortly after the single currency’s introduction, Williams said.

Last year Germany cut its relative labour costs by over 2%, whereas Spain’s and Italy’s rose by 25% and 34% respectively.

Spain also suffers 45% unemployment among young males, an external deficit, and a lack of significant labour reform and probable resistance to it.

Germany is increasingly being called upon to prop up peripheral countries, not least financing a large portion of the European Financial Stability Forum.

Many capital markets practitioners expect Spain to follow Greece, Ireland, and possibly Portugal in accessing central support.

Support packages would “neither truly make uncompetitive countries solvent, nor remove the underlying problem in the short term”, he added.

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David Walker
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