It's A Small World After All.(Global Investor)(global economy)

Byline: Holger Schmieding; Schmieding is chief European economist for the Bank of America.

Aren't we all supposed to become more alike in the age of globalization? Strangely, this isn't what's happening.

Aren't we all supposed to become ever more alike in the age of globalization? Strangely, this doesn't seem to be happening, at least not in a reliable fashion. Although Asia, Europe and the United States are linked ever more tightly together by capital and trade flows, their economic performance early this year diverged wildly. While the German economy expanded at its fastest pace in 12 years and Japan managed to beat the gloomy forecasts, the United States languished in semi-stagnation.

Some reasons for the divergence are obvious. First, short-term data exaggerate the genuine gap. For instance, Germany's growth spurt was boosted artificially by an unusually mild winter, which kept construction humming through the cold season. Germany, and with it the euro zone as a whole, will look less buoyant in the next set of data.

Second, the much-hyped global credit crunch is anything but. It is not global, and it is not a full-blown credit crunch either. Losses from investment in U.S. subprime mortgages have hit financial institutions in Europe as well as in the United States. But by its very nature, real estate remains a very local business. The downturn in the housing market is mostly a U.S. (and U.K.) phenomenon. Only small parts of the euro zone such as Spain and Ireland are suffering a comparable fate. For Germany and Japan, which both had protracted corrections in their own real-estate markets over the past 10 to 15 years while house prices were surging in most Anglo-Saxon countries, this is a pain of the past, not a handicap for the immediate future.

For most banks in the euro zone and Japan, the U.S. real-estate losses are modest. These banks see little reason to curtail their lending to solvent households and businesses at home. There are exceptions; after all, the subprime issue exploded onto the international scene last August with the problems of a small German lender called IKB. Still, German bank lending has accelerated to its fastest pace in six years.

There are more subtle reasons for the recent economic divergence. All developed countries in the world have benefited from the flood of cheap imports from China, which help make many goods more affordable for ordinary people at times of very restrained wage growth. However, Germany and Japan have embraced globalization wholeheartedly as producers as well as consumers. Companies from Germany and Japan have outsourced domestic production more aggressively than their U.S. counterparts to cheaper climes, be it to ...