Bill Jamieson A convergence of the wrong sort

COMMENT

BILLJAMIESON | Executive Editor of The Scotsman

A convergence of the wrong sort

It’s now not just the southern countries of the EU that are suffering from a lack of growth.

IT could be hailed as good news of sorts. There is indeed long sought convergence in the European Union. Unfortunately, it is convergence towards slowdown. Figures for the first three months of 2013 show a return to recession. Indeed, the decline in real GDP points to a depressing truth that, six years on, output is still lower than at the beginning of 2007.

The story is the same in the eurozone where output also languished below the Q1 2007 level. A sixth consecutive quarter of decline means that this downturn has now lasted longer than the financial crisis. And given the dire economic outlook for several peripheral countries there is little prospect of improvement in 2013.

For most of the past three years the story in Europe has been one of crisis and deepening recession in the peripheral countries of the single currency area but signs of flickering growth in the northern European core. Unfortunately, the malaise looks to be spreading to the heart. And as it does so, public attitudes to the EU have hardened notably. The UK is far from alone in its scepticism.

The latest figures show the French economy again contracted by 0.2 per cent in the first quarter of 2013, adding to the mounting troubles of deeply unpopular President Hollande. But it was Germany where economic concern was focused. German growth was disappointing. It is now within a whisker of joining other core economies in a double dip (in some cases triple). Europe’s largest economy now appears to be suffering a perfect storm. Germany’s great strength has been its export sector, not just in terms of the mix of goods, but also in terms of destinations – China being the jewel in the German export portfolio crown. With Chinese data suggesting more subdued growth, German businesses are likely to feel that weakness.

Finland, another nation considered part of the economically solid eurozone core, also entered recession with a second consecutive quarter of negative growth.

On financial markets this convergence of bad news is greeted with some sanguinity: investors draw comfort that the European Central Bank will be obliged to embark on a policy of monetary loosening and adopt a euro-wide programme of Quantitative Easing: the ‘bad news is good news’ mantra of fund managers. In May the ECB cut its interest rate from 0.75 per cent to 0.5 per cent. However, it is unlikely the ECB will embark on such a policy soon. Analysts believe a programme of bond purchases will

more likely be reserved for a crisis situation in which the bond markets turn against a country such as Italy or Spain that is of systemic importance.

Overall, the eurozone continues to struggle as the public and private sectors deleverage and structural reform continues slowly. Most forecasters see little prospect of an improvement in eurozone GDP next year. Further ahead slow growth looks the likely trajectory. Peripheral countries in the eurozone, unable to devalue, will continue to suffer domestic austerity and recession.

For most of the past three years the story in Europe has been one of crisis and deepening recession in the peripheral countries of the single currency area but signs of flickering growth in the northern European core. Unfortunately, the malaise looks to be spreading to the heart.

Growing disillusionment

In the UK chancellor George Osborne is at least able to hail signs of a first quarter 0.3 per cent growth in GDP as evidence that the economy is at least ‘on the right track’. However, on the basis of the latest figures, it looks as if the member states of the eurozone are on the wrong track. The costs of the zone’s one-size-fits-all strategy are becoming brutally apparent.

And in public attitudes the euro malaise appears to be spreading beyond the economic sphere. I am grateful to Stephen Lewis, economist at Monument Securities, for drawing my attention to recent research by the prestigious Pew Research Centre in Washington. Its conclusion from an extensive survey of European public opinion is that ‘the European Union is now the sick man of Europe’. The report noted a decline over the past year in public support for the EU project in all the major members of the EU. When Pew conducted its 2012 survey, the median proportion, among these states, of respondents taking a favourable view of the EU was 60 per cent, with a median of 34 per cent believing that EU integration had strengthened the economy. Those proportions dropped to 45 per cent and 20 per cent respectively in this year’s survey. Most significantly, approval of the EU in France had fallen from 60 per cent last year to 41 per cent this year. Indeed, EU approval in France was, apparently, lower even than in the UK, where it was 43 per cent. “These results,” Lewis concludes, “spell trouble ahead for the EU.” A continuing erosion in the EU’s strength and standing in the global economy cannot but impact on attitudes in Washington and elsewhere. And this disillusionment would almost certainly intensify on further evidence of a policy split between France and Germany at the core as public anger builds against ‘austerity economics’. n