Bill Jamieson

COMMENT

BILLJAMIESON | Executive Editor of The Scotsman

Silver lining for UK exporters in the euro gloom

The ECB’s rate cut at least recognises that the recovery needs help.

IS there really such a thing as a eurozone surprise? So many extraordinary events have unfolded over the past five years that it would be difficult to describe any development in Europe as ‘untoward’. So it was strange that so many commentators greeted the recent interest rate cut by the European Central Bank from 0.75 per cent to 0.25 per cent as unexpected.

In truth, it could hardly have been so given the latest economic forecast downgrade issued just days previously by the European Commission. It warned that while it still expected the eurozone would return to growth in 2014 after two years of recession, the recovery would be at a slower pace than previously forecast. It now reckons the eurozone economy will grow by just 1.2 per cent next year. This follows a further contraction of 0.4 per cent in 2013 and is the second downward revision since the start of the year.

This is another setback for the euro area and a further blow to its pretensions to be a competitive and successful global economic leader. Olli Rehn, the EC’s economics commissioner, sought to put a vainglorious spin on events: “There are increasing signs that the European economy has reached a turning point,” he began. “But it is too early to declare victory: Unemployment remains at unacceptably high levels. That’s why we must continue to modernise the European economy.”

Such statements continue to make light of the reality that weighs heavily on the eurozone economies. A combination of austerity policies dictated by the need to bring down budget deficits, unemployment in double percentage figures, deadweight sovereign debt and, to cap all this, a rising euro has led the eurozone to the brink of a deflationary trap. Inflation declined to 0.7 per cent in October, well below the ECB’s two per cent target, racking up the pressure to stave off the threat of growth-stunting deflation.

Two destructive forces deny the eurozone a job-creating recovery: a chronic lack of competitiveness that continues to cripple the peripheral economies, and the intolerable burden of public debt. It is these two in combination – brought on by years of votebribing politics, reality avoidance and statistical fiddling – that lie at the heart of the single currency zone’s continuing problems and its inability to mount a sustainable recovery.

Which way the euro?

One immediate consequence of the interest rate cut was a drop in the value of the euro. The jury is out on whether this will be followed by a prolonged downward drift or whether inflation-hawk Germany will tighten the monetary screws by other means. For

the moment it is hardly comforting news for UK exporters struggling to gain traction as the UK’s domestic economy has strengthened. With total exports edging up just 0.1 per cent month-on-month in September and falling by 2.2 per cent overall in the third quarter, the UK is far from seeing a hopedfor rebalancing with a greater contribution from exports.

However, there is some silver lining here. Survey evidence on the UK’s foreign orders has been showing encouraging signs of improvement. The export index of the purchasing managers’ survey for manufacturing showed export orders rising for a seventh successive month in October and at the fastest rate since February 2011 with higher demand reported from Asia, the United States, the Middle East, Russia and, yes, mainland Europe. Meanwhile, the export order balance of the CBI’s industrial trends survey has risen to a 31-month high in September. While the weaker euro against sterling makes life immediately more difficult, the underlying reasons for the ECB’s actions may cause immediate forex reaction to be revisited.

Rob Harbron, economist at the Centre for Economics and Business Research, said the rate change “highlights the extent of the damage done to the eurozone economy over the five years since the financial crisis began and also how far there is left for the recovery to go.”

The detail of the Commission’s forecast gives little comfort. Among the countries to suffer the biggest growth downgrades were Spain, where the Commission now expects growth of just 0.5 per cent, against 0.9 per cent previously, and France, now expected to grow by only 0.9 per cent next year, down from a previous estimate of 1.1 per cent.

But that was not France’s biggest headache. The move by ratings agency Standard and Poor’s to cut the country’s credit rating from AA+ to AA not only hits the financial standing of France internationally, but it also intensifies political problems for the French government.

S&P warned that it expects government debt to hit 86 per cent of GDP in 2015 and unemployment to remain above 10 per cent until 2016.

So after a period of relative calm when the eurozone was not making crisis headlines, we are again reminded that its major structural problems still have to be tackled. And it will be a long while yet before they are – even assuming that the eurozone’s member governments have the understanding, the will and the courage to act. n

“There are increasing signs that the European economy has reached a turning point. But it is too early to declare victory: Unemployment remains at unacceptably high levels. That’s why we must continue to modernise the European economy.”