After years of turmoil and economic hardship, the eurozone is finally emerging from its double-dip recession. Growth remains both fragile and unimpressive—at probably no more than 1.5 per cent over the next couple of years. But despite the continued drag of too much debt, too few jobs and geo-political risk, the eurozone’s economy appears finally on the mend.
The picture is not unambiguously bright. But the odd gloomy sentiment indicator or negative output number notwithstanding, the eurozone recovery is broadening and deepening. Ireland, Portugal and Spain have all left their bailout programmes and are growing at above the regional average. Even Greece is finally emerging from its harrowing recession. While the initial recovery was led by exports, household demand and particularly investment are reviving and budget austerity is easing. The European Central Bank (ECB) in June launched another pack of measures to get credit flowing again.
While the eurozone will continue to grow, the pace will be much below that of the United States or the United Kingdom. Most Europeans are enjoying higher salaries and a sunnier outlook, but high unemployment—still at 11 per cent—will dampen consumption. Some large companies in the heart of Europe borrow at dirt-cheap rates. But many smaller ones and those from the south are starved of credit. As long as many companies and households are still sitting on too much debt, borrowing is unlikely to boom. Germany and many other eurozone countries are doing better, yet big question marks still hang over Italy and France, which have been storing up economic trouble for years.
The biggest risks to Europe’s recovery are now external. An escalation of Ukraine’s civil war and much broader economic sanctions on Russia would be a big blow. So would be a hard landing in China. Internal risks are much diminished. The euro looks sounder, not only because of the ECB’s promise to do “whatever it takes” to keep it together and the painful and successful efforts of many troubled countries to narrow their budget and trade deficits. The eurozone countries have also started to make the single currency more robust. Many observers ridicule Europe’s emerging banking union as too slow, timid and complex. But with the ECB taking over banking supervision, national governments will no longer be able to mollycoddle their national banks and the principle of mutual help in case of crisis has been established. This is an important step forward.
Many people worry that the eurozone could descend into deflation and a Japanese-style lost decade. Even the very low inflation rates now seen in the eurozone can make it harder to pay down debt while increasing the agony of reform processes. But low price rises also make pay cheques last longer. And as long as Europeans do not get too gloomy and start hoarding money (of which there is little sign), low inflation must not be bad for growth. A tight labour market in Germany (plus the introduction of a national minimum wage next year) will push wages and prices up in Europe’s biggest economy. Now that the euro is coming down from its dizzying heights in the international currency markets, monetary conditions will ease.
Big questions remain about the eurozone’s medium-term outlook. Is the heart of Europe doomed to sluggish growth, high joblessness and sliding global importance? Too many people look to Brussels for an answer, to see whether the EU finally sets up a fiscal and political union. But the real momentum is bottom up.
Spain has cleaned up its banking sector and liberalised its labour market. Spanish unit labour costs are falling and its exports are growing faster than Germany’s. The story is similar in Ireland, Greece and Portugal. It is now considerably faster to set up a business in Portugal than the US, reports the World Bank. In Italy, a new, young Prime Minister has promised to reform the electoral system, public administration, taxation and labour markets—all in 100 days. Let him achieve a third of this and take three times as long, and it would still be more than Italy has done in 30 years. The changes happening in Spain, Portugal and perhaps soon in Italy could put growing pressure on France to follow suit. Some of Europe’s less competitive countries might soon start catching up.
The case for progress should not be overstated. Europe lags behind the US when it comes to entrepreneurship, innovation and openness. Asian countries are overtaking it in some areas, too. But the eurozone crisis appears to have shaken much of the region out of complacency, and this is the first step towards sustainable growth in the future.
