January 12, 2012 / 10:19 AM / 7 years ago

Insight: Europe's north is bustling, its south closing down

BAD HOMBERG, Germany/MADRID (Reuters) - At German car parts maker ixetic GmbH, Dragan Knezevic is struggling to keep up: His job as foreman is to make sure there are no hold ups in assembly of the parts needed to keep Audis, VWs, Toyotas and the like on the road.

“We are going full speed over all three shifts. Early, late and night shift,” he says at the bustling plant in Bad Homburg, outside Frankfurt.

They are so busy that temporary workers have had to be found.

Some 1,450 kilometers (900 miles) south, Jesus Cirilo has a very different kind of stress. In the Madrid neighborhood of Prosperidad (Prosperity) - a district that completely belies its name - he has just given up his family’s long-held butchers stall at the open-air market after a quarter of a century.

“My father has run this stall as a self-employed businessman for at least 24 years but times are hard,” he said.

“We have a loyal and solid client base, but the crisis has left us demotivated and we’d rather not mortgage our future with a state-backed loan ... considering how bad the situation is.”

Knezevic and Cirilo are unlikely ever to meet. But they are both typical of contemporary Europe - the one living in a prosperous north, full of opportunity and wealth; the other struggling in a debt-laden south where hopelessness and poverty are on the rise.

The two men reflect an increasing two-speed Europe. But it is not the ideological one between those wanting more or less European integration that has been talked about for years in the corridors of Brussels.

This two-speed Europe is economic and societal - the creation of two distinct blocs within a union that is supposed to be coming together not dividing.

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Graphics: Europe's economies: link.reuters.com/dur85s

Europe's joblessness: link.reuters.com/kes74s

NORTH AND SOUTH

Nowhere is this great divide clearer than in jobs. The latest data from Germany showed a jobless rate at 6.8 percent, the lowest since reunification of East and West Germany two decades ago.

In Spain, unemployment is running at a whopping 21.5 percent. Furthermore, Spanish youth employment is running at nearly 50 percent, threatening to condemn an entire generation to staying at home or gathering on street corners.

It is, of course, Spain’s debt - along with that of other southern laggards Portugal, Italy, Greece and not quite so southern Ireland - that is exacerbating the problem.

Euro zone countries that lived beyond their means in boom times, mainly the geographically southern tier, are now paying the price. The problem is that nothing that is happening now is doing anything to narrow the divide as they struggle to slash debt with harsh austerity measures.

Consider government borrowing costs, which need to come down in the financially strapped south to keep debt under control.

Investors, at heart, don’t trust the south. A bill auction last week, for example, cost Spain more than 2.4 percent on an annual basis. By contrast, investors actually paid Germany to hold their money - a rare case of negative yield.

The Netherlands is also getting paid to borrow.

The divide is clearly visible too in what markets are demanding to hold longer-term debt. Spanish 10-year bonds yield around 5.4 percent, some 3.5 percentage points more than German equivalents.

Next door Portugal, already bailed out by the European Union and IMF, pays 11 percentage points more than Germany to borrow money for 10 years.

The high cost of raising money compounds the pain of government programs put in place to shrink mountainous public debts.

It also squelches any prospect of growth and keeps people out of work. Hence the trials of the Cirilo family butchers.

TROUBLE AHEAD

Growth itself is waning pretty much across the euro zone, even in the north. Germany’s latest Gross Domestic Product figures showed it contracted slightly in the fourth quarter.

But it still put in a solid 3 percent for 2011 as a whole, compared with maybe 0.7 percent for Spain at the most.

“What crisis?” asked Berlin manicurist Manuela Flanders, honestly surprised to be queried by a visitor about how business was going as the euro zone reels.

That blissful ignorance of wider European hardship is one reason why Germans are reluctant to help their struggling neighbors.

For the coming year, Germany and Spain may find themselves closer, with the former projected to grow at 1 percent and Spain to stagnate, according to Reuters polls.

Germany and the relatively robust north, however, are in a far better situation to bounce back.

“When it comes to the capacity to accompany growth policies, it is clear that many countries that would need it badly are not in a position to do so, because it could only deteriorate their fiscal position,” said European Commission spokesman Amadeu Altafaj.

Even the recent fall of the euro against other currencies - partly a reflection of the crisis - is likely to help Germany and the northern exporters like the Netherlands most.

German exports rose 2.5 percent in November.

TWO TALES

Such demand is clearly evident from a trip to Knezevic’s ixetic plant.

The assembly hall, crammed with half-automated machines about the size of a fitted kitchen, is about the size of a football pitch.

Staff go about their routines in grey jerseys and blue trousers as components arrive and finished parts are rolled away on trolleys. At every workstation, tools are neatly arranged in designated slots and there are even bottle holders for a sip of water as the team churns out the hydraulic pumps for cars.

It had to relocate a break room to allow for an additional quality checking facility. The company has met the demand with temporary workers.

“With just our own staff we wouldn’t be able to keep up the pace. Some departments even do weekend shifts,” Knezevic said.

Back down in Madrid’s Prosperidad, there is no such buzz.

Only a few years ago the market boasted dozens of stalls selling fresh produce and gourmet-quality Serrano hams and manchego cheeses.

But already under pressure from cheaper supermarkets the economic crisis has been final straw for many. The shutters on more than two thirds of the stalls are now padlocked and empty crates gather dust.

As the market slips in to disrepair, with no investment from cash-strapped local authorities or the stall owners, many of whom are walking away, fewer people come to shop, hastening its demise.

“The market’s very old and there’s no support for the small store owners,” Cirilo said, eyeing the traffic in Europe’s increasingly slow lane.

Reporting by Luwig Burger, Paul Day and Annika Breidthard. Graphics by Scott Barner.; Written by Jeremy Gaunt, editing by Mike Peacock

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