All in all it appeared to be business as usual. Not for long.

The great unraveling began with the exposure of the perilous fiscal position of several Euro area countries, including Greece, Portugal, and Ireland. The Euro zone is not a fiscal union. Its not even made up of homogenous economies. A manufacturing and export-oriented economy like Germany has less in common with Greece than with a country like China.

If countries follow something like the Five Stages of Grief, Germany is stuck between Denial and Anger. German voters are certainly very angry that they have to bail out the spendthrift nations in the Mediterranean. In truth, Germanys current account surplus helped create deficits elsewhere. Germanys relation to Portugal, Greece and Ireland was the same as Chinas relation to the U.S. Voter anger, however, makes it difficult for the German politicians to undertake any steps, bold or otherwise. As the situation drags on, mainstream economists talk increasingly of the possibility of insolvent countries defaulting and of the European Union breaking up.

The muddy economic situation, coupled with some peculiarities of the lubricants industry in Europe, make predictions even more difficult. It should be clear to everyone that there is no European market as such. Whether the Euro zone survives or not, its clear that the countries comprising the Euro have different economic situations, and they will follow different routes to recovery. There is no European growth rate as such.

The wide variance in economic prospects is reflected in the lubricant demand growth in European countries, bravely projected by Kline & Co. in a recently completed study. As can be seen, growth prospects vary quite dramatically for different countries. This is illustrated by example of three groups of countries – Germany, Austria, and Switzerland; Spain and Portugal; and Greece.

Germany, Austria, and Switzerland together represent the largest manufacturing bloc in Europe, with Germany being the dominant country. It is useful to think of these three countries as a single bloc as supply chains of many manufacturers straddle the three countries. The fortunes of the manufacturing sector in Austria and Switzerland are driven by Germany. Germany is the largest economy in the Euro area and also the leading manufacturer and exporter in the region. It is a leading exporter of automobiles, machinery, metals, manufactured products and chemicals. While most of the exports are to other EU member countries, the country also has significant exports to the U.S., China and other Asian countries.

While itself in good fiscal position, Germany has been dragged down by the weakness in other EU countries, and this has affected its exports. The big challenge for Germany is to reorient its economy toward domestic consumption and exports to Asia to keep up its growth. Vehicle production in 2010 grew by 13 percent over 2009, just below the 2007 production levels. Among all countries in the region, Germany has shown the fastest recovery in the automotive industry. All other countries are still significantly short of their pre-recession production levels.

If Germany can remain unaffected by the problems of its neighboring countries, its lubricant volume will continue to grow until it achieves pre-recession levels. In the long term though, the market will be flat as increasing automotive population on one hand and longer drain intervals on the other hand result in zero growth for lubricant consumption. This region is also the largest consumer of synthetic lubricants and synthetic blends.

Spain and Portugal both experienced a construction and housing boom due to cheap credit flowing into the country. They now face a period of painful readjustment. Unemployment is running very high – as much as 40 percent among the regions youth. In the last three years, automotive production has declined at an average annual rate of over 6 percent. At the best, the region can hope for a growth rate of about 0.6 percent per year over the next five years – mainly due to some recovery in consumption as passenger car and commercial vehicle drain intervals return to normal and industrial production increases.

This growth masks the steep decline that is expected in Portugal, the more badly hit of the two countries, and that is offset by some growth in Spain. Portugal experienced a collapse in the construction sector due the austerity measures implemented by the government. These included cancellation of large infrastructure projects such as a high speed rail link to Spain, a new airport at Lisbon and several motorway concessions.

Finally consider Greece. Between 2003 and 2007, Greek GDP grew by 4 percent driven partially by infrastructure spending related to the 2008 Olympic Games. The economic growth turned sharply negative in 2009. The government adopted austerity measures that included cutting public spending, reducing the public sector, tackling tax evasion and undertaking labor market reforms. However, all of this has not been sufficient.

Similar to Portugal, the commercial segment in Greece saw a massive reduction in consumption due to the collapse of construction, power, defense and mining sectors. Many big construction projects planned by the Greek government have been put on hold during 2011, as a result of state budgetary reductions. These include the Peloponnese, the Athens-Sa-lonica, and the Western road projects. The only sector that provided good performance is the maritime sector. Demand in this segment is driven by global trade rather than the Greek economy.

Overall lubricant demand in Greece is projected to decline by 1.5 percent per year over the next five years. The next two years will of course be crucial in determining the recovery route followed by the economy. Both automotive consumer and commercial lubricant sectors will see double digit declines in consumption due to reduction in vehicle usage, drain interval extension and contraction in construction, mining and defense spending. Decline in the industrial sector will be modest, mainly due steady consumption in the marine segment, which accounts for more than 50 percent of the industrial segment.

Thus these three country clusters are quite different from one another in terms of recovery prospects and growth trajectory. The fact that they (with the exception of Switzerland) share a common currency makes predicting their future such a difficult task. When other Euro area and EU countries such as the United Kingdom, France, Italy, Ireland and Nordic countries are factored in, the outlook becomes distinctly muddy.

Further complicating matters is the fact that Europe is an exporter of lubricants. Even as some economies in the region deteriorated, lubricant demand was strong throughout 2010 and up to the first half of 2011. It is not clear what contributed to the strong demand – regional demand, exports, or a re-stocking by market participants following the de-stocking during the recession. Market participants have been fearful that the strong demand in 2010, in contrast to the bleak economic situation, forebodes a nasty contraction in 2011. Whether that will come about only time will tell.