Europe: The Last Great Potemkin Village Where "The Rich Get Richer, And Poor Get Poorer"

Tyler Durden's picture

From Charles Gave of GKResearch

On the surface, it would seem that the euro crisis has calmed. Markets have rallied since the summer and, to borrow a phrase from Herbert Hoover, “prosperity is just around the corner.” But outward appearances in Europe are like a Potemkin village. Behind the well-scrubbed facades, Southern Europe is in a death spiral. Anyone convinced that the European monetary union has come through the crisis stronger is a victim of the slickest PR campaign in history.


Let’s be very clear here: this is what the euro has wrought. This destruction of the non-German industrial bases has taken place with the active complicity of the European technocrats. They did not even realize that France, the EMU’s second largest economy, for example was becoming hopelessly uncompetitive.

Let's go one step further. According to the official GDP statistics the French economy since the beginning of the euro experiment has done as well as the German economy:

But note that if we use the ratio of the two industrial production indices, then we see that the French economy has “underperformed” the German economy by 20%.

The loss of industrial capacity in France, Italy and Spain has taken place in the private sector part of the economy. The implication is thus that the share of the private sector in the economy must have been going down in Italy and France, and up in Germany. To compensate for demise of the private sector, the "solution" in good Keynesian logic is of course to grow the public sector.

The red line in the chart below depicts reality; the blue line the Keynesian fairy tale. French debt went through the roof, to pay for a massive increase in government spending as a percentage of GDP.

Needless to say, the same thing has happened in Greece, Spain, Italy, Portugal, etc., where the collapse of the private sector has been offset by a rise in government spending financed by an even bigger rise in new debt. Where does that leave us? Well, we have a bunch of countries deindustrializing fast, issuing tons of "riskless assets" to mask the fact that they are in a very serious depression.

This is very visible in the next chart (see below). The euroland industrial production index is FLAT since 1998, with Germany’s index up 30%, the French one down -10% and the Italian and Spanish ones down- 20% each.

This is a zero sum game if there ever was one, with Germany being the main winner and the other three economies massive losers. Instead of leading to convergence in euroland economies, the euro project has led to massive divergences, with the strong getting stronger, and the weak getting weaker.

For these trends to change, we would need radical change. We are not talking about retirement age being nudged up a year in one country, or a rules for firing people liberalized an iota in another. We would need to see bloated states firing 20% to 40% of civil servants, and the government spending share of GDP to plunge; the cost of labor to fall by at least –20% relative to the cost in Germany; the return on invested capital in Europe’s South to move above the ROIC not just in Germany but also in Eastern Europe. There is zero chance of these types of reforms taking place.

Which means the logical end of the euro experiment is thus to have all the European factories in Germany or its office bases in the East and none in the South of Europe where the costs are too high and will remain too high under almost any scenario. We have already part of this journey, which I fully expected when I wrote in 2000 that the euro was going to lead to "too many houses in Spain, too may civil servants in France and too many factories in Germany."

The dire truth is that one cannot maintain a fixed exchange rate among countries which have different underlying productivity growth rates, different social systems and different political arrangements. Nothing will ever change this reality.

* * *


The ECB has thrown enough money at the market to, for now, reduce borrowing costs and allow equity prices to rise (unfortunately so is the euro, threatening exports). This buys time—but these actions are not enough to solve the structural problems created by the euro. The private sector has shriveled in Southern Europe, as government spending  and debt has soared. If we have France, Italy and Spain together enter a debt deflation/debt trap, the crisis will be far too big for Germany to handle: and if this happens before German federal elections are held (no later than October) we could see the European political crisis revive in full force. Do not trust the Potemkin façade of the euro. I would not own fixed  income in any country in euro land, especially with the euro being so strong. Only equities in the freest parts of the economy should be considered

* * *

For much more on why without external devaluation - i.e., with a fixed currency regime - Europe's periphery is doomed to see another 30-50% in wage decreases before it all falls apart read "Next Up For A "Recovering" Europe: A 30-50% Collapse In Wages In Spain, Italy And... France"

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Ghordius's picture

the article is built on the premise that if the rules are the same and the playing level is plain and flat - and various economies experience different growth rates during the very short period of ten years - then someone is getting the shaft and someone else is manipulating something

the spirit of a central planner - tinker until it fits your mental model - please, do not take in account the many other variables that are in play, including things like creative destruction and different business micro-cycles

imho a projection from a different world

Manthong's picture

“They did not even realize that France, the EMU’s second largest economy, for example was becoming hopelessly uncompetitive.”

Um.. competition is antithetical to an aristocracy hell-bent on driving the globe into collectivism and totalitarianism.

trebuchet's picture

its been in the charts for years, and everyone is realising it. The French politicians sell their quick fixes for power to gullible publics who WANT to believe this time its different. 


You MUST believe this time its different........................ you know you want to, come on, do it for me

Ricky Bobby's picture

Yes Yes Ghordius the Greeks are embracing creative destruction. I am sure in there heart they are glad to sacrifice themselves for the greater good.

From Germany With Love's picture

They had a recent election; the result of that election was (and polls confirm that) that they don't want austerity and nor do they want to leave the Euro. But they can't have both. (And probably they can't have the Euro in the mid-term either.)

I interpret the election this way: they want to stay in Euro slightly more than they want to avoid austerity.

eatthebanksters's picture

Of course they don't and of course thay do!  Every person of infantile intellect always wants more for less...but what will happen when the teet of the Nanny government dries up?  We are going to find out the answer to that question fairly soon.  On a side note, when I think of socialism and communism and the phrase 'from each according to his abilitiy to each according to his need'I think that is man's most basic behavior was not the animalistic desire to take as much as possible and work as little as possible, then the dreamers might be on to something.  But since trying to change the collective behavior of mankind has about as much a chance of success as changing our orbit around the sun, maybe those real smart elitists who live in a world of theory ought to get in the real world and create policy on real world behaviors.  Perhaps if people were accountable for their choices and responsible for their survival they would work a little harder and be a little more productive...simple formula, when more people are less productive the world suffers, when more people are more productive the world benefits.  Pretty fucking simple. And tell me one last thing, as a kid who came from a lower class background and created a small measure of success for myself, why the fuck should I feel sorry for some kid who makes poor choices because his single parent made excuses for their own behavior and their kids behavior.  I used to feel more!  If you are brutally honest with yourself you know the difference between right and wrong and you can make decisions to positively impact the outcome of your life.  If society continues to allow people to live in denial and make it PC to slam people who speak out agianst it, then this game is gonna end badly.

CheapBastard's picture

The Revenu de solidarité active obviously needs moar members.

mightycluck's picture

The global economy is a Potemkin Village. Look at the dollar vs gold, and the US-like economies of Argentina and Venezuela. AKA, gov't gone wild! Love this guy's charts!!!!!

WmMcK's picture

I takes a Potemkin (v/p)illage.

piceridu's picture

Potemkin Village People...

Young man there's a place you can go
I said young man when you're short on your dough 
You can stay there and I'm sure you will find 
Many ways to have a good time. 

It's fun to stay at the U.S.S.A.

It's fun to stay at the U.S.S.A....

All Risk No Reward's picture

It takes a debt Potemkin Village to slay the world with 5th grade math...

Debt Money Tyranny

CheapBastard's picture

thnx mightycluck, looks like USA inflation is running about 10% again according to those's the link to that chart:


Helps splain why consumer confidence plunged and retail sales dismal.

Banksters's picture

In between bailouts, Draghi, LaGarde, Barroso and VanRumpy, always say the worst is behind the eurozone.   2nd half recovery, bitchez. 




DoChenRollingBearing's picture

OK...  Germany clearly IS the big winner in Europe.  If you look at the industries I am involved with (automotive replacement parts), you see only ONE European country as having a strong car & truck industry: Germany.  INA of Germany, owned by one woman, is the second biggest bearingt company in the world.

And who wants Peugeots, Citroens and Renaults (France) not to mention Fiats (Italy)?  People want German cars: Mercedes, BMW, Audis and VWs.

At the low end, even the Europeans are choosing Hyundai and Kia.  

Ghordius's picture

DoChen, Germany has a habit of being the big winner in europe, back to the time when they had to label their products as "made in germany" so that people could avoid their products, or back to the many times they had to rebuild their factories

this has it's root in a culture that has a knack for certain industries, in the same way as the British culture is very good at marketing, etc. etc.

but the article wants to say: only thanks to the EUR, and this is, imho, BS

AssFire's picture

Said it before if Europe is the USA, then Germany is Texas...

It is quite simple: 4 keys to success:

1) Out-smart the stupid people

2) Out-work the smart people

3) Never let everyone know all the keys to success


Ralph Spoilsport's picture

5) Never give a sucker an even break.

CPL's picture

6) Distract and decoy to waste an opponent's resources.  Entropy is a greater force than creation.  

7) Feed bad ideas so they quickly burn out.  Fighting bad ideas is only met with resistance.  Best to force the progress of a bad idea to it's conclusion then introduce the real solution after all parties are tarred and feathered.

8) Play the game from behind your opponent while re-enforcing the opponents "good" idea.

9) Create opposition dynamic in the opponent's camp, divide and conquer by allowing a bad idea from within their camp to flourish to counter leadership and game play.

- Things learned from Hockey.

q99x2's picture

Shoot an email over to the Bernank. He'll print them up what they need.

Solarman's picture

He is already doing just that.

Pretorian's picture

The main export(bitches) for Germany is EU. Sucking money and live out od uncompetitive countries. IF Germany was out of EU they would suffer from expensive DM preventing them from export surplus .But not until there is  stuppid PIIGS countries to buy there single currency theory .

From Germany With Love's picture

>implying Germany wasn't an export nation before the Euro

The way to reduce export surpluses in capitalism is to be found on the buyer's side. No credit, no imports. No imports, no German export surplus.

earleflorida's picture

people the world over will never stop buying their [german]

expert craftmanship... their love of labor, their satisfaction of a utility made to last a lifetime need-be,... their uncompromising  quality control, that every german proudly adopts-- all handcrafted from their minds and by their hands are these products from a-z...that the world revels in-- that being said, they are the greatest technological innovators in the world!

die Dankgebet von`Deutsch

Tyler Durden's picture

Funny, considering it is the Bundesbank which funds said current account credits via the TARGET2 system whose greatest claimant is... Germany.

Should the periphery resume importing once again, watch this balance resume surging.

From Germany With Love's picture

Absolutely. That is the price our Elites are prepared to "temporarily" pay until the Euro zone economies re-start and we're all back to the "old normal". Of course my phrasing isn't precise as it's not the German elites who are going to pay the price - but what do they care as long as somebody else has to pay?

I don't believe in the future of the Euro anymore. Germany had agreed to join the Euro under the condition that all other nations accepted some basic principles of Ordnungspolitik. And everyone did. Of course with some nations it was just lip service.

You can't have a single currency if you have a divided house when it comes to economic policy. And that is why the Euro is doomed.

Ghordius's picture

the other nations were slow in adopting Ordnungspolitik, yes, and several German budget deficits did not help

but the direction taken is well inside the tenets of it - just note the austerity drives toward balanced budgets in the eurozone

it's a marathon, not a sprint - it will take years. and meanwhile we have a currency war

Obama4Ever's picture

EU: The perpetual crisis that never actually does anything. Year after year after year on the verge of imminent collapse.

The story is getting really old.

EmmittFitzhume's picture

Typical reactionary position.  You will be one of those caught in the crossfire

falak pema's picture

One concrete point about the Debt to GDP graphic on France : The 2008/2009 spike that sent that ratio from 60% to 85% WAS NOT GOVT SPENDING INCREASING, IT WAS TRANSFER OF PRIVATE DEBT AFTER 2008 FROM PRVATE BANK BS TO THE PUBLIC BS; 

Hey presto and the debt ratio went to 85%. 

That is in essence what happened all over the world and what will continue : That State sector is the sponge that drinks up the cotinuing Oligarchy debt mayhem. Having said that, some countries have better fundamentals to withstand the rot; aka Germany.

And as the article rightly points out the labour hourly rate in France lost its competitive edge WRT Germany from 1995-2005; thats whats helped to kill french productivity and competivity.

AngryGerman's picture

... and the fact that their women don't shave. Nobody wants that.

Hulk's picture

Don't know about that. Humans fucked the neanderthal out of existence and those were some hairy Bitchez !!!

orangegeek's picture

Socialists fundamental approach - spending OPM (other people's money) - has run its course.



CPL's picture

Weird thing is the money they are spending has no value other than an interest payment.  It doesn't go into capital goods or services.

Zolko's picture

After the collapse (resulting in separation) of the Soviet Union, the collapse of the European Union. Closely followed by the American Union ?

Iam Yue2's picture

Cinco Dias: Now it seems that the euro has saved my bacon, Roubini remains pessimistic, as made clear in a recent interview in Paris. "Spain is better than during the summer, like other peripherals, but the problems are not solved. Especially looking at debt levels, the problems of the banking sector and the recession, which will be long". And as forecast dropped one of his bombs: "There is a good chance that Spain could not cope with their debt and have to agree on a debt reduction with its creditors in 2015." This means that Spanish debt is too big and will be negotiated, or require a reduction in the claims of creditors, such as Greece.

michael_engineer's picture

The author states "This buys time—but these actions are not enough to solve the structural problems created by the euro."

Are the structural problems really rooted in resource constraints now? The creation of the euro may have had very little to do with what was likely to happen irregardless of debt burden, deficits, or reassigning stuckees holding paper of many forms of little real value. Just look at resource trends in those countries and do some Jethro style cyphering.

smacker's picture

Good to see my past employer isn't on the list :-)

JR's picture

The “Widening disparity between very rich and very poor” was one of Gibbon’s five reasons for the decline in the Roman Empire. The other four were:

“Concern with displaying affluence instead of building wealth;

“Obsession with sex and perversions of sex;

“Art becomes freakish and sensationalistic instead of creative and original;

“Increased demand to live off the state.” –Edward Gibbon, author, The History of the Decline and Fall of Rome

When the central planners at the Fed are through, we'll all be poorer - except the oligarchs and friends:

My daddy was a brakeman on a highball traveling train
Mama she raised four little children and the family had a good name
And papa and mama wanted all for us they never had
Big brother little brother sister too none of them turned out half bad
Cept me I'm the black sheep of the family.

Big brother went to college and became a doctor man
I guess he makes about a million dollars a year off the folks own insurance plan
He's got a big long Mercedes Benz and a house overlooking the town
He sits in his Jacuzzi and he watches the sun go down
And he feels real sorry for me I'm the black sheep of the family.

Yeah I drive me a big ol' semi truck I'm makin' payments on a two room shack
My wife she waits on tables and at night she rubs my back
And I tell her what my papa said to my mama when he got off a highball train
Wake me up early be good to my dogs and teach my children to pray.

Little sister married a banker yeah he owns a country club
He bought her a big ol' racing horse and a funny lookin' little dog
He buys her big rings and diamonds and a brand new Japanese yacht
They like to get together and talk about all the things they've got
But they never mention me I'm the black sheep of the family.

Yeah I drive me a big ol' semi truck...
I'm sayin' woman wake me up early be good to my dogs
And teach my children to pray.

Black Sheep of the Family by John Anderson

otto skorzeny's picture

thanks-you reminded me how much I hate country music

smacker's picture

The wide productivity differences between EZ member states has always been the elephant in the room since Day One of the EUR. The EU political elites and the armies of EU-crats all chose to ignore it, despite many warnings. Hopefully the elephant will soon roll over and crush them.

rustymason's picture

As a young man in 1988, upon first hearing about the EU project, even then I knew that it was not going to work as advertised, that the bureaucrats setting up this giant scam would get rich and everyone else would get the shaft. If even I knew that then, then anyone in charge of the EU project knew it also. Ergo, it's all going according to plan. I'll bet the banksters and eurocrats are surprised that people are so gullible and that it was so easy to take so much so fast.

andrewp111's picture

If you take all of Europe as a single consolidated country, everything is fine. They just need to complete the process of federal consolidation. Half measures can not work.