The financial newspapers were awash last weekend with the news that German economic output increased by 2.2 per cent during the second quarter of this year compared to the previous quarter.

This makes it equivalent to a 9.1 per cent increase a year. The news from Germany has brought very much the usual comments. And it still poses the same old question. Is Germany still the locomotive of the European economy? If yes, will it be capable of energising the whole of the EU? If yes, for how long can it continue to do so?

The performance of the German economy appears even more remarkable given the sluggishness of economies such as Italy, Greece, Portugal and Spain, the four countries that have been traditionally looked down upon in the Euro zone. In fact, Italy grew by less than half a one per cent, Greece experienced its seventh consecutive fall in output and shrank by a further 1.5 per cent, while Spain and Portugal grew by just 0.2 per cent, implying more a situation of stagnation than a situation of growth. This performance has brought back fears of a possible default on the debt of the governments of these countries.

Following the Greek crisis last winter and spring, this summer has been relatively quiet and we probably all felt that the prospect of a default of sovereign debt within the eurozone had become a thing of the past.

There are now those who fear that come autumn, the financial markets will once more be back in turmoil, and what we are experiencing now is only a lull caused by the summer heat. Such persons feel that the particularly high yields on sovereign debt in some eurozone countries, especially Greece, and the doubts about the long-term sustainability of the euro will come back to haunt us in the coming months.

Two other economies that were being looked at with interest are those of France and Ireland. Many consider France to be Europe’s second economy, after Germany. French economic output increa­sed by 0.6 per cent in the second quarter compared to the first quarter of this year. This is still below the eurozone average of just under one per cent. Ireland had been performing very well but was not spared by the impact of the international economic recession. At the beginning of this year it showed strong signs of recovery as its output grew by close to three per cent. The expectation is that growth of Irish output will be around the 0.5 per cent level in the second quarter.

Looking at things from a broad perspective, one needs to appreciate that the one per cent quarter-on-quarter growth in the eurozone gives an annualised growth rate of four per cent. This is three times the average growth rate recorded in the eurozone in the first ten years of existence of the currency. Thus the performance can only be judged as spectacular. On the other hand we are seeing once more the affirmation of a two-speed Europe, with Germany (and some other countries) racing ahead, while Southern Europe (Malta excluded) trails far behind.

We also need to appreciate that this growth in output happened when heads of state and ministers of finance were discussing how to bail out Greece. What must have helped significantly has been the depreciation of the euro during that period. Germany was a great beneficiary of this thanks to its large manufacturing sector. In effect, all countries that have a sizeable exporting sector have benefited from the lower value of the euro. However, we need to ask whether this benefit has already been lost as in this third quarter (for which we have no data), the euro has appreciated again.

It would seem that the answer to the question posed in the headline of this week’s contribution is a definite yes. In such circumstances, we will need to see the extent to which German growth in output will create a ripple effect in the rest of the European Union. We will also need to see how the Maltese economy will perform in the light of this German resurgence. In the meantime the locomotive hopefully continues moving forward!

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