Over the course of the eurozone debt crisis, commentators and analysts have spent quite a bit of time and expended quite a bit of effort discussing the divide between the eurozone core and the eurozone periphery. The theme in the EMU is now disintegration and fragmentation -- it is indeed more disunion than union.
As Mario Draghi's op-ed published in Die Zeit on August 29 reminds us, the eurozone's economically strong nations do not generally exhibit a propensity to benevolence when it comes to the periphery:
"Countries must be able to generate sustainable growth and high employment without excessive imbalances. The euro area is not a nation-state where persistent cross-regional subsidies have sufficient popular support. Therefore, we cannot afford a situation where some regions run permanently large deficits vis-à-vis others."
Indeed, the imbalances that do exist are only tolerated because they derive from the mechanics of the zone's payment transfer system, TARGET2. While Mario Draghi insists that it is the euro that is irreversible, the situation may have reached a point where discord and divisiveness are the zone's only defining and enduring characteristics.
In note entitled "No Solidarity Without Conditionality" Nomura's chief European economist Jacques Cailloux does a masterful job of demonstrating the divide between the core and periphery using a variety of poignant graphics.
With unemployment spiking in Spain and Italy and topping 25% in Greece, the disparity between the jobless rates in the core and the periphery has never been greater:
Source: Nomura
Although manufacturing activity (as measured by PMIs) in the core has begun to converge with that in the periphery, setting manufacturing production to 0 in 2005 reveals the divergence of fortunes:
Source: Nomura
The flood of liquidity into the currency union isn't translating into growth in the M3 money supply in the periphery:
Source: Nomura
Finally, the most telling chart of all, TARGET2 (im)balances shown for the core and periphery:
(Click to enlarge)
Source: Nomura
These graphics demonstrate the extent to which the EMU is no union at all. Growing nationalist tendencies in both the core and the periphery will exacerbate the divide. I believe there is a non-zero chance that the currency union breaks up entirely in the next two years. In the absence of a complete disintegration, the economic divide between the core and periphery will persist and tensions will remain high, ensuring that the euro currency will have a difficult time getting traction. I recommend betting against the common currency (FXE) for the foreseeable future as there is no sign whatsoever that the region will emerge from the crisis as a stable confederation.
