Patrick Artus, the chief economist at Natixis, highlighted a closely-guarded European secret the other day. The Eurozone isn’t really an industrialized economy, and the problem is getting worse each year. In a Natixis report, published earlier in September, Artus describes two of the monetary block’s major problems: the Eurozone is in a period of de-industrialization, and industry is concentrating on a handful of places.
Artus’ first point—that the Eurozone is in a period of de-industrialization—is easy enough to demonstrate, and it should be expected by investors. What may be less expected is the fact that most of the de-industrialization happened after the financial crisis.
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Eurozone industry falls flat
The European debt crisis is the cause of (or at least ran concurrently with) deindustrialization in Europe. 25 percent unemployment is not part of the recipe for industrial growth.
The above charts show employment in the manufacturing center as a percentage of total, versus % of GDP related to manufacturing and capacity utilization in Europe over the last decade. The charts basically speak for themselves, but the employment versus GDP chart shows an interesting trend.
The percentage of GDP stemming from manufacturing was flat for years, and seems almost destroyed by the financial and debt crisis. At the same time, manufacturing employment has been falling for the entire decade. European industry is becoming more efficient. In European terms, that means that it has moved to Germany.
The new core
Most investors won’t find it difficult to guess where the biggest part of the industry in the Eurozone is located. Germany is, by most metrics, the most important industrial producer on the continent. It and some of its much smaller neighbors are seeing increases in their industry, while it leaves the periphery.
The core of the European Union used to be described as Germany and France and the Nations between them. In economic and political terms, that has changed since the European debt crisis. With France’s economy in a reasonably shabby state, Germany has become the sole powerhouse. It’s neighbors Austria, Belgium and the Netherlands join it as the continent’s industrial engine today.
Recessions cause a huge decline in the capital utilization rate, as seen above. This shock allows businesses more choice when they return to using capital. In this case, they chose to move to these core countries. The chart that demonstrates this is a little busy, but the general idea can be seen.
For the Eurozone, this trend means that the countries that lost their industry in recent years may never gain it back in the same way again. The continent as a whole is seeing a large amount of shrinkage in industry, and new industry is flooding to the New Core.
That New core will be the engine of Europe going ahead, and the countries on the periphery—particularly those with bigger problems—will find it hard to recover. Countries like Greece, Spain, Portugal and Ireland will see emigration, and economic depression for a long time, unless something shakes the continent out of its fugue.