Expect a prolonged period of sub-par activity with high unemployment and intensifying deflationary pressure
Europe's fledgling recovery did not stall in the third quarter of 2013 but it was a close run thing. Mainly owing to a weaker performance by the Big Two – Germany and France – the growth rate in the euro area slipped back from 0.3% to 0.1%. Few in the financial markets expect the 17-nation single currency zone to enter a triple-dip recession, but nor is anybody predicting anything other than a prolonged period of sub-par activity in which unemployment remains at one in eight of the workforce and deflationary pressures intensify.
It's not hard to pinpoint why growth is so weak in the euro area. High levels of joblessness have sapped consumer confidence. Governments are struggling to balance the books with austerity programmes. Businesses are reluctant to invest even when they can find a bank willing to lend to them. That has left exports as the main source of growth, and these have been choked off in recent months by the strength of the euro.
Even for a country like Germany, a rising currency was enough to more than halve the growth rate to 0.3%. For a country like France with serious competitiveness problems it meant a slight fall in national output. For Italy, which has had problems competing ever since the euro was founded in the late 1990s, the result was a ninth quarter of recession.
Brussels may take some comfort from the fact that growth is positive in two of the euro area's most troubled economies – Spain and Portugal – while the pace of decline is slackening in Greece. The reason for this, however, is that imports have collapsed due to the weakness of domestic demand.
Europe's growth is too feeble to eat into the spare capacity that has resulted from the double-dip recession of the past six years. Indeed, it will take sustained growth rates of 0.4-0.5% a quarter to prevent the amount of slack increasing. At 0.1% a quarter unemployment will continue to edge up and inflation will edge closer to zero. Debt burdens will become crippling for those countries that have high levels of debt in relation to national output.
The very real threat of the euro area becoming Japan with a 20-year time lag more than justifies the cut in interest rates announced by the European Central Bank last week. Further action will be needed to inject some spending power into the economy and to reduce the value of the currency. Chances of the UK having a balanced recovery will the euro area is struggling are zero.
The pivotal role of the euro area also explains why policy makers in Washington and Brussels are becoming frustrated with Germany's dogmatic refusal to run down its massive trade surplus by importing more from its neighbours. Europe would benefit from a second Marshall plan but 65 years on from the original nobody is take on the role played in the 1940s by the United States.
As a result, the euro's lost decade will drag on and on. The existential threat to the euro has been removed by ECB boss Mario Draghi's insistence that the central bank will do all it takes to secure the future of the euro. But if saving the single currency means permanent austerity, sky-high unemployment and a relentless squeeze on living standards, sooner or later Europe's citizens will wonder what exactly it has been saved for.
Eurozone crisisEconomicsEuropean UnionEuropeGermanyFranceLarry Elliotttheguardian.com © 2013 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds |
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