The Problem:
All the current brouhaha of Greek insolvency and the weakening condition of PIIGS (Portugal, Ireland, Italy, Greece and Spain) is merely a symptom of an unsustainable growth model in the past decades
The E – growth model:
An increasingly competitive Germany exports and gathers a surplus. To prop-up weakening demand from the PIIGS, German Savers pitch in (buying govt. bonds; investing in capital markets). When that stopped we had the respective governments sustaining this demand through unsustainable deficits. This growth model has reached its last thread.
When this demand (that was created artificially) disappears the corresponding portion of surplus that was generated by Germany will also vanish…seems rather intuitive.
This will be followed by a period of demand weakening for Euro zone but more importantly a catharsis for the PIIGS where they might suffer some temporary pain but in time will re-adjust to become as competitive as Germany. The final outcome would be a stronger Euro zone that is a net exporter.
Should Germany become less competitive by increasing its wages? (Ridiculous!!) Can an entire euro zone becoming a net exporter – In an era of suppressed demand … make recovery even more difficult? (I don’t know)
The E-growth model has an eerie similarity to the “China – America” dynamics. A portion of China’s exports were funded by deficit laden America. China has to move towards domestic demand to sustain its economic growth.
It is becoming increasingly apparent that in a global scenario of diminishing returns the best returns will be generated from emerging markets with a potential for domestic demand (China, Brazil, India, Africa). Capital has already started moving towards these countries.
This domestic demand is going to be the battlefield for the great economies of America and Europe. If and When the demand from emerging markets primes…These great powers will be jostling to capture the emerging markets.