« …Now, you're thinking of Europe as Germany and France. I don't. I think that's old Europe. If you look at the entire NATO Europe today, the center of gravity is shifting to the east. And there are a lot of new members. And if you just take the list of all the members of NATO and all of those who have been invited in recently…” Donald Rumsfeld, answering a question from Dutch journalist in 2003.
Donald Rumsfeld was not certainly first person to make the distinction between Old Europe (or Core Europe) and New Europe. In the first half of 2000s, Germany and France were heavily accused of being economically old-fashioned, and of not fully embracing the principles of free market. They were quite often compared to the Eastern and South European countries which were at the time showing remarkable growth rates and which were seeing high levels of foreign direct investment. The current situation around PIIGS clearly shows that when one always needs to take the “too-good-to-be-true success stories” with a pinch of salt. Time is certainly the best judge.
Looking backward, the high growth rates shown by countries like Greece, Spain, Baltic countries and Ireland were simply result of high debt, real estate bubbles and doctored statistics. The current crisis proves that they were not driven by real economic activity. On the contrary, the overall macroeconomic situation of France and Germany now remain remarkably solid. Not only the financial sectors in Core Europe have survived the crisis intact, but also their industries remain productive and competitive. German car companies like VW have gained significant market shares, whereas French engineering and service companies like Vinci, Alstom, etc have become internationally successful companies. Whereas once highly reputable UK banks have been tarnished by the crisis, the core European banks like Deutsche Bank, BNP Paribas, and Soc Gen are running the show in Europe.
Perhaps, the figures describe the picture most objectively. If we are to combine Germany and France into one group and all the PIIGS countries into another one; one sees that the difference is significant. The implications for the future are also huge. Countries like Greece, Spain and Ireland will need to go through a winding down process whereby they will have to sell their national assets to foreign entities.Germany and France will continue to be first-rate economies. The current CDS outlook also confirms the picture. For example, Greece CDS levels are 272 bps higher than that of Germany. Certainly, market is also another good judge.
Disclosure: No ownership of the above mentioned positions