Lessons from Europe's Winners and Losers

Berlin had perfect weather last week, and there was no better place to watch the world go to pieces than Dressler's open-air terrace on Unter den Linden. Berlin famously is one of the world's coolest cities, an edgy outlet for young artists. But it is also the face of the economic future. German unemployment is down from 11% in 2006 to 6.8% this April, with barely a bump during the Great Recession of 2008. Back in 2006, by contrast, Spain's unemployment rate was just 8%. Now it's at 25%. Spain is likely to go bankrupt, right after Greece, and the Germans don't really care. All of Germany's export growth in the past ten years has gone to the east, not the south.

One really can't talk about a European economy when key indicators are moving in opposite directions in different countries.


Germany will emerge from the European crisis intact. So far, Germany hasn't even noticed that there is a crisis. Berlin real estate prices are soaring, I'm told, as Greeks and Italians turn up with suitcases full of cash to invest in one of the few property markets that showed no price appreciation during the bubble years. More important: the smartest Greeks and Spaniards are looking for work in Germany. Germany's workforce has begun to shrink rapidly, but it will assimilate skilled workers and professionals from the feckless European south.

On paper, Germany's economy should collapse between now and 2050, as the number of Germans between the ages of 15 and 59 falls to just 33 million from today's 50 million. That's almost as bad as the population decline during the Thirty Years' War (1618-1648), which left wide swaths of German territory empty. The Great Elector, Friedrich Wilhelm I (1620-1688), solved the problem by inviting in French Protestants, who emigrated to Prussia in huge numbers after the revocation of the Edict of Nantes in 1685, as well as Slavs, Jews, and whomever else might be available. German was a minority language in the Berlin of Frederick the Great, and it will probably be a minority language again in twenty years.

Why should Germany thrive while Spain implodes? That's like asking why Facebook is worth a lot and Myspace is worth nothing. It's a winner-take-all world. Countries that do well have to do a few things extremely well. Germany makes the world's best machine tools, some of the best heavy engineering equipment, not to mention autos. German manufacturing dominates innumerable key niches. The Spanish don't do anything well. They haven't done anything well since the Spanish Empire outsourced its manufacturing to Flanders in the 16th century. Germany has a score of marquee manufacturing brands, as well as hundreds of lesser-known quality manufacturers, of which my favorite is Howaldtswerke, a ThyssenKrupp subsidiary that makes the Dolphin class submarines for Israel. Name one world-class Spanish manufacturing brand. There aren't any.

It's not only in manufacturing. With its 82 million people, Germany has a cumulative total of 1,618 Olympic medals. Spain has 50 million people, but only 115 medals. On a per capita basis, that's one eighth as many. Spaniards don't wake up in the morning with the desire to go out and be the best in the world at something. There are hundreds of first-rate Italian firms, most of them small (intentionally so, to keep under the tax radar), and there are plenty of world-class French products. Spain is a bust, which is why it almost certainly will go bankrupt. It lived off the world's most egregious real estate bubble for the past ten years, and now that the bubble's popped, there isn't that much else to the Spanish economy. There are plenty of smart Spaniards, to be sure. They are the ones who will end up working for Germans. There are also plenty of smart Turks, and as Turkey lurches further into Islamism, many of the best Turkish engineers will bail out and work in Germany as well.



Don't believe the reports that a new Lehman-style financial crash is in the offing. What's going to happen is much less dramatic. In 2008 no-one knew how to value Wall Street's liabilities (for example, AIG's famous guarantees on subprime securities). Now the full extent of the problem is known to everyone. It's just a negotiation now over who gets knackered. And the answer, by one means or another, is the southern Europeans.

Spain probably has to spend the equivalent of 20% of GDP bailing out its bankrupt banks. It won't quite bail them out: the $85 billion of subordinated debt of the banks -- two-thirds of which is owned by individuals -- will be vaporized, so Spaniards will lose a good deal of their savings. If Spain has to reduce debt payments to creditors like Greece, other European banks (mainly French) will get hung out to dry just like the Spanish banks. Their subordinated debt will vaporize, and the French will lose a large part of their savings. It's easy to fix a financial crisis when you can put the damage back to individuals, insurance companies and pension funds. A lot of Europeans will get poor, fast. And the Chinese, or the Germans, or the Canadians, or someone with ready cash will come in and recapitalize the bankrupt banks. The Germans will be left with a lot of loans to the European Central Bank. They'll live with it.

