European Affairs


garretmartinDivisions are an unfortunate reality of Europe’s DNA. For much of its history, the continent’s aspirations for peace and unity have fallen prey to disputes and wars over religion, politics, or ideology to name a few. The European Union’s current woes are the latest example, with the ongoing Eurozone crisis undermining the ideal of integration as ancient centrifugal forces emerge anew. On the surface, the current divide reflects contrasting economic fortunes, with the Southern European states (particularly Italy, Spain, Greece and Portugal) disproportionately impacted by the Eurozone debt crisis, and forced to rely on substantial economic relief from the wealthier Northern European states. According to Indermit Gill, chief economist for Europe and Central Asia at the World Bank, the EU economy can be viewed as three lanes of traffic, a slow-speed lane in Western Europe, a high-speed lane in formerly Communist Eastern Europe and a third lane, the South – “where cars are going in reverse.”


But the divide goes further than economic indicators, extending also to perceptions, stereotypes and questions of responsibility. Simply put, it boils down to economics versus culture. No consensus exists when it comes to explaining the travails of Southern Europe and the common currency. Unlike those who underline economic policy failures or the systemic weaknesses of the Eurozone, critics of the Southern European states instead point to the South’s profligacy which they oppose to the North’s prudence.  This North/South split thus matters because all parties disagree when it comes to the central causes of the current Eurozone turmoil; and by extension, this dissension undermines efforts to resolve the crisis and ensure the sustainability of the monetary union.


A close study of major indicators recently published in The Economist (see figure 1 below) paints a bleak picture of the state of the Southern European economies.  The interest rate gap between the Northern states, which are enjoying extremely low borrowing costs, and southern debtor countries, which are facing rising bond yields, is significant. For example, Italy’s 5.972 percent yield on 10-year bonds towers over Germany’s 1.215 percent interest rate on 10-year bonds.  Moreover, the Southern European states are dogged by rising unemployment rates– 15.2% for Portugal, 21.9% for Greece and 24.6% for Spain – that are significantly higher than the EU average of 10.3%. They are also burdened by higher government debt: 159.1% of GDP for Greece, 119.6% for Italy and 110.1% for Portugal – than the EU average (82.2% of GDP). Finally, the Southern European states are also suffering from a distinct loss of competitiveness as a consequence of the increases in labor costs far outstripping productivity gains in the last decade – in stark contrast with Germany’s experience.

Figure 1:


More troubling is that a further number of factors indicators suggest that the North-South economic gap is more likely to widen, rather than lessen, in coming years. Indeed, Southern European states performed rather poorly in INSEAD's 2012 Global Innovation Index, which measured global innovation, broadly defined, with Greece ranked at a disappointing 66th position, sandwiched between Colombia and Uruguay. The report, according to its editor Soumitra Dutta, indicates that ‘the bifurcation between northern Europe and southern Europe [will] become more acute as northern economies innovate more and southern economies innovate less’.

Furthermore, while youth unemployment in the European Union has risen to an average of 22.6%, Southern Europe has been particularly hard hit, with Greece and Spain reporting rates of over 50%. The gap may be explained in part by a higher education gap between Southern and European nations which, according to Staffing Industry, has resulted in an oversupply of labor for low skill vacancies in Southern Europe, at a time when manufacturing jobs are moving to cheaper markets like China or India. Amelioration will not be easy. Not only are austerity pressures likely to weaken any push for further investment in higher education and training, but the continuing economic difficulties in Southern Europe are spurring a brain drain towards the North, especially Germany.

The North-South divide, however, goes deeper than this sober portrait of deeply contrasted economic performance, extending also to the realm of perceptions, identity and responsibility. The persistent Eurozone crisis has provided fuel for a serious resurgence of stereotypical regionalism. The politicians and experts who promote these stereotypes do so because they tend to characterize Southern woes as self-inflicted.  They regard the current North-South divide as the logical reflection of a fundamental split between the two parts of the continent, rather than a temporary aberration.

Proponents of the cultural explanation for the North-South divide, like Tino Sanandaji from the Institute of Industrial Economics, are returning to a certain extent to the ideas of 19th century German sociologist Max Weber. The latter had suggested that Protestant countries in Northern Europe outperformed the rest of the continent because of their superior work ethic, because they were thriftier and because they possessed more effective social capital, that is to say the efficacy of social networks.  Following in Weber’s footsteps, Sanandaji argues that the current gap in economic outcomes between North and South cannot be explained by differing policies, since both display roughly comparable levels of social expenditures, taxation rates and government sizes. Instead, similar policies are resulting in different outcomes because the latter are ‘mediated through the deeper structures of society’, such as culture, norms, or social capital.

However, the cultural argument for the North-South divide hardly holds universal sway. Greek economist Theodore Pelagidis stresses the determinant impact of economic policies, and draws parallels between Greece’s current challenges and those faced by Finland at the end of the 1980s. In response to a severe recession spurred by a global economic downturn, Finland moved away from economic nationalism, opened up its economy and liberalized key sectors. The challenge for Southern Europe is mostly the same, he argues, as nations seek to modernize their economies, open domestic markets and implement effective regulation.

Moreover, a closer look at various statistical indicators robustly counters many of the politically expedient stereotypes. According to OECD data, Southern Europeans tend to work more hours than their Northern counterparts – 2032 hours on average per year for Greece, 1774 for Italy, and only 1413 for Germany. The effective retirement age for Southern European states is comparable to that of Germany, and Germans enjoy more legal vacation days than their counterparts. In addition, Northern Europeans receive far more government assistance per capita than Southern Europeans, undermining the perception that the latter live off the state’s largesse.

Simple economics and cultural complexities are driving a significant wedge between North and South, and bridging that gap in performance and conflicting perceptions presents an immediate and acute challenge for the EU. But the future sustainability of the European project will ultimately depend on recapturing the ideals and spirit that helped the continent to overcome its tragic past, and which now are in danger of being lost according to Luxemburg Prime Minister Jean-Claude Juncker. Speaking at a European Institute event in October 2010, Juncker sounded quite dejected:

Europe’s real difficulty is the very weak knowledge concerning other countries.  The French do not know about the Germans, the Sicilians do not know about the northern part of Denmark, and the Danish do not know what the real situation of Alsace and Bavaria is.  The more we are coming together inside the framework of the European integration process, the less interested we are in the situation of others.  As European integration appears to be an evident process, people are not pushed to invest themselves in the reality of other countries.  That is the main weakness of Europe.

European leaders and citizens would do well to heed his warning call.

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