Bill Jamieson One gargantuan kiss of life

COMMENT

BILLJAMIESON | Executive Editor of The Scotsman

One gargantuan kiss of life

Whatever else may be said about the efforts of the European Central Bank to unfreeze interbank lending markets and blow some life into the eurozone economies, no-one can accuse it of half-hearted effort.

IN February the ECB made a further €530 billion of low-cost loans avail able to European banks under its Long Term Refinancing Operation (LTRO). Added to the €489 billion for which the banks bid in December, the ECB has made close on €1 trillion available.

This is a colossal sum, one without precedent. But then the situation in which the eurozone has found itself is without precedent. Those hoping for some instantaneous spasm in the patient, a dramatic jerk back to consciousness after this Zeppelin balloonsized kiss of life, will have been disappointed.

The evidence from latest Purchasing Managers Index and business and consumer confidence surveys remains mixed at best. Indeed, the eurozone is on course to have tripped into recession with a further economic contraction likely in the first quarter of the year. Added to the 0.3 per cent fall in the fourth quarter of last year this would make for two successive quarters of falling output, thus fulfilling the technical definition of recession.

However, despite the painful economic shrinkage underway in Greece and other southern eurozone countries, it looks more like a grazing encounter with recession rather than a headlong plunge. And the view in official circles is that the eurozone may now be past the worst of the financial crisis. Fears of a systemic banking seizure have eased. And there is a sense that at least precious time has been bought.

But for how long? And time to do what, exactly? There is an overwhelming expectation that the crisis in Greece, far from being cauterised by final agreement on the second bail-out, will be unable to withstand yet more austerity. Indeed, there is a widespread expectation that Greece will be forced to apply for a third bail-out in a few months – at which point Germany and other northern eurozone members are likely to bring matters to a head. The patience of German voters and many in Chancellor Angela Merkel’s own party has already been stretched to the full. The country’s constitutional court continues to question the legality of further expansion of the eurozone’s bail-out fund and an application by Greece for more without evidence of an underlying upturn in the economy and its public finances cannot but trigger calls for a default and exit from the eurozone.

The question now being anxiously discussed is whether the ECB’s re-liquefaction of the banking system has done enough to prevent a Greek exit having a domino effect, with other stricken eurozone member countries choosing to attempt an exit. If it is deemed the best way for Greece to secure the prospect of long-term recovery out of her appalling state, why can’t others follow suit? In truth, little has been resolved. And it is continuing apprehension that the final act of the Greek crisis has still to come that remains the single greatest obstacle to a recovery in business and household confidence.

There is an overwhelming expectation that the crisis in Greece, far from being cauterised by final agreement on the second bail-out, will be unable to withstand yet more austerity.

Spluttering along

For the moment, Europe’s economies continue to splutter along under this menacing cloud. Germany, for so long the motor economy, continues to remain the best prospect for recovery, but even here the evidence of a sustained upturn is patchy. Retail sales in January fell 1.6 per cent month on month, with big ticket items such as furniture, cars and IT equipment down by between 1.7 per cent and 3.3 per cent.

Set against this, consumer confidence has been on an upward trend and machinery equipment orders showed a 2.4 per cent rise month on month in January.

For the eurozone as a whole, the picture is also mixed. Manufacturing new orders fell back 1.4 per cent at the start of the year. Retail sales, however, rose unexpectedly in January with a gain of 0.3 per cent month on month (and were up 0.7 per cent across the EU overall), though a separate survey has indicated economic activity remains weak.

And February’s eurozone purchasing managers’ index (PMI) for services and industry showed activity in these sectors contracted in February. The composite PMI reading fell to 49.3 in February from 50.4 the month before. Any reading below 50 indicates contraction.

Feeding in this PMI data suggests that eurozone GDP in the first quarter of the year could be minus 0.1 per cent. This would reinforce the view that the worst in terms of economic momentum could now be over. But that is not the same, however, as a sustained and self-feeding upturn.

And it is the prospect of an extended period of low growth that will pose formidable social and political problems for the single currency area. Unemployment may be tolerable in Germany at 5.8 per cent. But in other eurozone countries the jobless picture is dire: 7.4 per cent in Belgium, 10 per cent in France, 9.2 per cent in Italy, 14.8 per cent in Ireland, 14.8 per cent in Spain and 23 per cent in Portugal. The eurozone’s problems are by no means behind it, and it would be foolhardy for those regular attendees at eurozone summits to pretend otherwise. n