Further polarisation between Eurozone countries looks inevitable without reform, according to chief economist, global government and inflation bonds at Hermes Fund Managers Neil Williams.

Williams said Germany emerged as “the biggest winner” in 2010, accounting for one third of Eurozone GDP, while most other members of the European Economic Monetary Union have experienced a deterioration in their positions.

Germany’s low and stable unemployment and estimated 3.6% GDP growth rate stands in stark contrast to many of its Eurozone peers, Williams said.

The largest member of the European Union has cut its relative unit labour cost (RULC) over 2%, while Spain and Italy have seen theirs rise by 25% and 34% respectively. Williams said that Spain remains the one to be most watchful of as it has been in external deficit since even before the convergence began in the 1990s and has yet to sustain meaningful labour reform.

“There, inaction would lead to further yield rises and fiscal strains- and yet, reform is more likely to be resisted by social unrest. With a highly indebted private sector and a male youth unemployment rate of 45%, Spain’s tensions could persist.”

Fiscal support packages delivered to struggling Eurozone members will neither truly make uncompetitive countries solvent nor remove the underlying problem in the short term, Williams said, representing a risk for 2011 that the less competitive countries will place increasing constraints on the countries trying to fund them.

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