AGIOS NIKOLAOS, CRETE, Greece—A handful of Estonians and a Pole are sitting around a Greek taverna, telling stories. There are some jokes about the good life the Greeks lead—all that vacation time, and the Germans pay for it! There are some anecdotes about the way time seems to work differently here, about how things take longer. One regales the others with tales of the Greek real-estate market. The thing to remember, he says, is that all houses have two prices: the "official" price and the "real" price. You pay taxes on the official price. You pay the owner the real price. Everybody knows about this, and everybody winks—including the tax office.
Ah, yes, someone says, those corrupt bureaucrats—we used to have them in Estonia, too. Ah, yes, someone else says, Polish houses used to have an official price and a real price. But that was long ago, a whole decade ago—back in the days when Europe was divided into West and East. Now, at least in the eyes of some, it is slowly redividing itself into North and South.
North and South: Not everybody is going to like that concept, especially not the new South, some of whose members are not necessarily in the southern half of the continent. For these are not geographical designations, but political terms of art. The South contains all those countries whose political classes have not been able to balance their national budgets, whose bureaucrats have not been able to reduce their numbers, whose voters have not learned to approve of austerity: Greece, Spain, Portugal, Italy, Hungary, Bulgaria, and—at the moment—Ireland.
The North contains the budget hawks: Germany, Poland, Estonia, Scandinavia, the Czechs, and the Slovaks. Britain's new government, with its austerity budget, aims to return to the North, following its recent experience of life in the South. France floats somewhere in between. Wealth, as such, isn't northern: Much of the South is very rich. But in the North, private wealth has grown more or less in tandem with the public sector. Private wealth and public squalor are more typical of the South.
Or at least that's one point of view. I do realize that these are subjective categories, and I also realize that the membership of these two clubs, as listed here, could easily be disputed. Polish bureaucracy is no better than the Spanish kind. Irish capitalism is in some ways healthier than the Czech version. Living standards are still higher in Italy than in Estonia. And some leaders of the South—socialist governments, ironically, in both Greece and Spain—are now struggling to institute reforms that should have been made years ago and are intended to make their economies more northern.
But even if we swap a few of the names around, or at least agree to disagree about some of them, it's still hard to avoid the existence of this new North-South division, which is suddenly so much more important that that old East-West division. It's also hard to avoid a few hard truths about the new North, which is clearly dominated by Germany. So far, Germany is leading the region by example: Its relatively high growth rate—achieved thanks to recent labor-market and tax reforms—is attracting imitators, not subordinates. Nevertheless, German economic clout within this region is large and will get larger.
At the moment, the New North is not the same thing as the Eurozone, either: Not all its members use the euro, the common European currency—though some of the South infamously does. Clearly, this is illogical: The increasingly similar, deeply connected and ever-converging economies of the North maintain different currencies. Meanwhile, Germany, France, Italy, and Greece—countries that have radically different attitudes to public spending and budgets—are bound into the same currency zone. Wouldn't it make sense to drop the euro in favor of a "northern" currency? How long can it be before that idea begins to seem like a good one, especially in Germany?
We aren't quite there yet: Europe, led by the Germans, did rescue the Greek economy earlier this year, of course, demanding massive structural and budgetary changes in exchange for a massive injection of money. But the rescue was not carried out in the name of European solidarity, or because the new North feels any responsibility for the new South. It was undertaken grudgingly, reluctantly, on behalf of banks that owned too many Greek bonds. And here is a prediction: It won't happen again.