COMMENT
BILLJAMIESON
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Executive Editor of The Scotsman
European Commission in a fantasy world The latest economic forecast from Brussels sees growth where others see only stagnation.
“T
he recovery is broadening. GDP growth in the EU, which has turned positive in the second quarter of last year, is increasingly driven by domestic demand.” So begins the latest official economic assessment and forecast from Marco Buti, the European Commission Directorate-General for Economic and Financial Affairs. In case the opening two sentences of the 165-page Winter 2014 Forecast were not sufficiently Panglossian, Mr Buti was only warming to his theme. “This year,” he continues, “domestic consumption and investment are set to expand further, reducing the dependency of the recovery on the external sector. Growth has also returned in many of the vulnerable Member States, and growth differentials across EU Member States are expected to narrow.” It is hard to conceive an appraisal of the state of the EU economy at such variance with the real world. But this is what passes for truth within the Commission headquarters in Brussels: a state of affairs beyond Orwellian. Here are the facts. The eurozone’s feeble recovery sputtered to a halt in the second quarter of this year. The continent’s economy is stagnating. There were some bright spots Spanish growth quickened from 0.4 per cent in the first three months of the year to 0.6 per cent. And both Dutch and Portuguese GDP, which had contracted in the first quarter, are now above these lows. But the euro area is being held back by poor performances in its three biggest economies. GDP fell in Germany, the biggest, and Italy, the third largest, by 0.2 per cent; France, the second largest economy, reports a GDP standstill. Investment bank Citigroup has cut its German growth forecasts once again, to 1.3 per cent for 2014 and 1.6 per cent for 2015, from 1.6 per cent and 2.0 per cent previously. “Prospects for exports and export-sensitive investment,” it notes, “have deteriorated in par6 Industry Europe
ticular. Germany is more vulnerable to external risks than other large eurozone countries.” The lacklustre recovery has barely dented unemployment across the eurozone. Now there is growing frustration over the timid response so far by the European Central Bank. ‘Berlin fiddles while Rome burns’ would be a fair description. There is clamour for more effective action – specifically measures to counter low inflation by adopting a programme of quantitative easing. Hopefully this will come by the time you read this.
The lacklustre recovery has barely dented unemployment across the eurozone. Now there is growing frustration over the timid response so far by the European Central Bank. As The Economist warned, “low inflation and negligible growth are a potentially lethal combination for countries weighed down by debt, as many are in the euro area. Moreover, the problem arises not just from high levels of public debt but also from excessive debt owed by households and firms. Even if inflation remains merely low it presents a problem for borrowers whose incomes are rising much more slowly, if at all, than they expected when they took out their loans. And if prices start generally to fall, this raises the real burden of debt.”
Pressing for flexibility So evident has the deterioration become – despite that blue-sky depiction of the European Commission – that EU leaders have agreed to hold an emergency summit on promoting growth and jobs on October 7, highlighting their concerns over the fragile economic recovery.
The statement announcing the summit baldy stated that “the recovery, particularly in the euro area, is weak, inflation exceptionally low and unemployment unacceptably high.” Italy has been pressing for greater flexibility in the application of strict EU rules on budget deficits, alongside countries such as France, arguing that an excessive focus on German-style austerity has hampered Europe’s recovery. Consumer sentiment in Italy slumped more than expected in August, the third consecutive drop, taking it back below its long-run average. Said Italian Prime Minister Matteo Renzi, “Europe must be more than the (bond) spread, rules and economic budgets.” A separate summit for the 18 eurozone members would also be held in the autumn. Expectations of radical central bank action were also boosted by remarks by a bank board member that the ECB was ready to adjust monetary policy stance further and that it “will provide additional liquidity to banks on the condition that they increase credit directed to the real economy.” All this has gone down like a plate of cold spaghetti in Berlin. German government spokesmen were moved to deny reports that chancellor Angela Merkel had telephoned ECB governor Mario Draghi to ‘demand answers’ regarding comments he made suggesting an easier fiscal stance, including perhaps a public investment programme, to boost the euro area economy. So has the ECB changed its course on austerity? And if she didn’t ‘demand answers’, what did she demand? Berlin declined further comment. Whatever the European Commission might say, EU leaders have clearly given up on those empty Commission platitudes about “recent improvements point to a path towards gradual normalisation.”… However, it conceded, “there is still some sailing to do n before we reach harbour.” Sailing to do? That’s putting it mildly.
