Each country in Euroland is at a different stage of the economic cycle. The Spanish and Irish econ...
Each country in Euroland is at a different stage of the economic cycle. The Spanish and Irish economies have been performing well on the back of low interest rates. However, Germany and Italy are suffering because these countries' governments have yet to implement appropriate labour reforms that will help kickstart their economies.
Chris Rice, head of European equities at Cazenove, says: 'Each country has different domestic profiles within the EU.'
According to Tom Elliott, strategist at JP Morgan Fleming, Euroland can be divided into two groups: the first group comprises the countries engaging in labour reforms such as the Netherlands, Spain and Ireland; the second group is the countries that are not engaging in labour reform.
Elliott says: 'Labour deregulation is the driving force behind the economies that are performing well in Europe. Countries with high employment levels generally raise more taxes through people's income and are usually in a better fiscal position.
'In the long term, countries that cannot raise taxes through people's income generally have to pay more to those living on unemployment benefits. If people do not have adequate retirement plans, pensions can become a growing cost to governments.'
Countries that are not presently engaging in good labour reform programmes include Germany and Italy.
Germany is lagging behind other EU countries and is likely to underperform this year, says Rice. The relatively high cost of employing people in Germany has left the country with a high unemployment rate.
German consumers are not spending and the dollar is weakening against the euro, which is damp- ening the nation's export competitiveness.
Elliott says: 'If Germany does not change its policy towards labour reform, the country will only get worse. There is a large number of people not working in the country, which creates extra expense for the government through social security costs.'
Instead of the German government addressing this problem, Elliot thinks it will try to raise corporate taxes to help generate extra revenue for the economy.
However, he says it would help Germany more if chancellor Schroeder stood up to the unions. But this could cause some problems. For example, in France, when Jacques Chirac tried to put pressure on trade unions, there were strikes and riots in the country. Although he thinks Schroeder should stand up to the unions he feels the same could happen in Germany.
There is also a fear that Germany could turn into the next Japan, says Elliot. Banking debt is high in the country and if this is not sorted out, the country could be heading in the same direction as Japan.
Rice expects growth to be between zero and 1% in Germany which will be the slowest in Euroland. A recovery in world trade is needed for Germany to recover.
Similarly, Elliot expects Germany to grow this year by about half a percent.
Rice says: 'Italy has similar problems to Germany. This country is more reliant on export and manufacturing and has some rigidity within the labour laws as wages had to go up with inflation. Italy has also the lowest birth rate, which is bad news for labour market supply.'
According to Elliott, in Italy the Berlusconi government is trying to reform pensions. However, the initiative is not clear as the government is fragile and we do not know where it is heading. He expects Italy to grow at around 1%.
Ireland has strong GDP growth as well as fast population growth and a great participation in the workforce by women.
Elliott says the Irish economy is performing well because the government invested wisely on infrastructure in the 1990s by building roads and railways. This has been one reason why the attitude has changed towards the country and it is performing well economically. It is also the western-most country in Euroland and nearest to the US.
Rice expects 1.1% growth for the whole of Europe. According to Elliot, one thing which would help Euroland is a cut in interest rates by the European Central Bank.
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