Bill Jamieson A low point – but not yet a recovery point

COMMENT

BILLJAMIESON | Executive Editor of The Scotsman

A low point – but not yet a recovery point

Weak business and consumer confidence is still holding back growth in the eurozone.

IT has taken an anarchic Italian comic to bring not only his country but the eurozone overall to a moment of truth: austerity economics may be digging the economies of Europe into an even bigger hole.

Initial reaction to the stunning success of Beppe Grillo in the recent Italian elections was that Europe needed this hirsute maverick like a hole in the head. Stock markets wilted, the euro fell and the anxiety needle of Italian sovereign debt shot up.

Beppe Grillo was by no means solely to blame. For a dangerous complacency had set in after the pledge by European Central Bank president Mario Draghi that he would do ‘whatever it takes’ to save the euro. There was a widespread assumption that this action alone had ‘rescued’ the eurozone’s troubled economies.

On the contrary. While sovereign debt yields fell back from the crisis levels reached last summer, there has been little change in the real world economies of the eurozone. And this matters, because without such an improvement, the deeply debt laden economies of Greece, Italy, Spain and others have little prospect of generating the higher tax revenues to bear down on that debt.

Official figures have duly confirmed that the eurozone’s economies shrank by a further 0.6 per cent in the fourth quarter of last year – the fifth successive quarter of decline. Eurozone GDP was down 0.9 per cent yearon-year in the fourth quarter and by 0.6 per cent over the year as a whole. The contraction was widespread with marked drops in consumer spending, investment and exports, and was particularly steep in the usual suspect southern periphery economies.

But it would be wrong to conclude that northern European economies did not suffer. The German economy shrank 0.6 per cent quarter on quarter, dragged down – ironically – by a resilient euro on foreign exchange markets and depressed conditions in other eurozone countries. France shrank by 0.3 per cent and the Netherlands by 0.2 per cent.

The strong euro, helpful though it may be for UK manufacturing exporters, has done the zone few favours in economic recovery terms. Indeed, one of the most striking features that future historians will wrestle to explain is how, despite the worst financial and economic crisis in continental Europe since before the war, the European single currency has displayed such strength against other leading global currencies.

Over the final quarter of 2012, consumer spending in the eurozone shrank 0.4 per

cent, and was down 1.2 per cent year-onyear. This has acted as a major constraint on recovery. Tight fiscal policy, a low level of consumer confidence after years being bombarded by headlines of the euro crisis and high and rising unemployment all contributed.

As for investment – one of the most cited arguments in favour of the creation of the euro in the first place – this fell by 1.1 per cent quarter on quarter, following reductions in the previous three quarters. And austerity economics in many eurozone countries also contributed by holding down government spending. This declined by 0.1 per cent quarter-on-quarter.

The strong euro, helpful though it may be for UK manufacturing exporters, has done the zone few favours in economic recovery terms.

Waiting for a lift

Is there no end in sight? There were signs that low business confidence was bottoming out in the final three months of 2012. So could this have marked the low point for the eurozone economies? The problem here is how to lift household and consumer confidence when unemployment is so high and when disposable income is being throttled down by wage freezes, growth in part-time working and of course ultra-low levels of interest income on savings and bank deposits.

So while economic activity may have hit its low point last autumn, it is likely to remain a struggle for the foreseeable future. Indeed, the IMF and others are forecasting that the eurozone will suffer further contraction across 2013 as a whole.

The downside of Beppe Grillo’s success, of course, is that another burst of political instability in Italy could put eurozone debt apprehension back on the boil: the interest on the country’s sovereign debt rises, worries about Italy’s creditworthiness spreads to the corporate sector and investment and business expansion is put back in the deep freeze.

One flicker of hope for continental manufacturers is that the euro eased back notably from mid-February after hitting a 15-month high against the dollar. But they cannot rely on the vagaries of the currency markets to address the deep-seated problems in the single currency area: high non-wage labour costs, structural barriers to higher productivity, highly expensive social welfare models and already burdensome levels of government spending.

But these issues are politically difficult even at the best of times. And in periods of recession such as now, austerity is already deeply unpopular and it is more likely that the ‘Club Med’ economies will move towards stepping up government spending rather than reducing it – despite the pledges they have given to obtain access to eurozone bail-out funds.

For these reasons, much has still to change before we can be confident that the autumn 2012 ‘low point’ really does mark the onset of a sustained recovery. n