The Eurozone’s So-Called Recovery Is a Bust
It’s almost a year since the eurozone was supposed to enter recovery mode. But you can’t eat statistics, as people in the southern-rim crisis nations have learned. Even now, the laser-thin growth numbers sustaining the “austerity works” argument are evaporating.
Even the lion-hearted austerians—British Prime Minister David Cameron and his chancellor, George Osborne, for instance—have been awfully quiet about this so-called “recovery.” This column has been of little faith since 3Q 2013, when the eurozone band struck up the post-crisis tune, and it is one of those moments when one regrets being right.
Last week was an especially rough one for the Europeans. Italy announced Thursday that its economy contracted by 0.2 percent in the second quarter. Given this follows a 1Q fall of 0.1 percent, the long-suffering Italians are now in recession for the third time in seven years.
In Germany, the engine of the European machine, the Economics Ministry announced simultaneously that industrial orders, an especially important leading indicator in the German context, dropped 3.2 percent in June, after a 1.6 percent fall the previous month. The Bundesbank had already warned that GDP, the eurozone’s standout at a measly 0.8 percent, had probably flatlined in the second quarter.
There’s a lot of this around now. France, the eurozone’s No. 2 economy, had 0.2 percent growth in the second quarter, and economists don’t rule out a return to recession.
Spanish politicians now make a meal of this year’s GDP figures. At 0.4 percent, 1Q growth was the fastest in six years. And this “accelerated”—count on the pols to pounce on this term—to all of 0.6 percent in the second period. In the Spanish context, calling this a recovery amounts to the austerians’ sick joke. With a quarter of the work force jobless and demand consequently lifeless, the better description is “nowhere, and not very fast.”
As to Greece, it long ago entered a category of its own. It has lost a quarter of its economy since the onset of the euro crisis, and the talk now is that a lot of Greeks may never again find a place in what remains of it.
And we can’t leave out Portugal anymore. Less the three months after it bravely left the bailout scene behind, Lisbon announced last week that Banco Espírito Santo, Portugal’s largest publicly listed lender, had collapsed and will require a €4.9 billion ($6.6 billion) rescue.
Mario “Whatever It Takes” Draghi, the European Central Bank president, spends his days now explaining that the eurozone recovery is just fine. The weakening euro will make Europe more competitive, he says, and inflation is below but near 2 percent, the bank’s target.
Again, it would be funny except that it’s not. The drooping currency reflects weak fundamentals, and while it may support eurozone producers to a modest extent, exchange-rate fluctuations have never in history substituted for sound policy.
As to Draghi’s inflation remark, let’s just say it doesn’t have the virtue of accuracy. The eurozone rate just fell to 0.4 percent, a four and a half year low and dangerous territory. A good shot of inflation would be the very best thing for the eurozone now. Only a technocrat running a bank domiciled in Germany could think otherwise.
There are a couple of things Europeans need to recognize now. One, the bill for signing on to Washington’s sanctions against Russia is coming due and could be paid in economic damage. “Geopolitical developments and risk above all led to certain reluctance in placing orders,” the German Economics Ministry observed when announcing the lousy factory figures.
The markets are rattled, and anxieties grow daily. The government in Kiev, puffed from recent successes in the field and now pressing its campaign in eastern Ukraine aggressively, is gambling that Russia will not intervene under any circumstance. To many, in Western markets and ministries alike, this starts to look like Russian roulette.
The take-home: The eurozone is simply too fragile now to indulge in high-wire acts of brinkmanship in global politics. It is the Obama administration’s bad call to push Europeans too hard on the Ukraine question.
Point two: A major confrontation between the austerians and the Keynesians—in alternative terms, between conservatives and social democrats—is sharpening and taking on a political hue. The dawning reality is that the E.U.’s choice of severe austerity when its crisis erupted—now fully six years ago—has not delivered anything to be called success outside of the investors who have come out well.
Antonis Samaras and Matteo Renzi, respectively the Greek and Italian premiers, have launched tax reduction programs to aid low-income families—givebacks Samaras calls “social dividends.” These two are leftists of one or another stripe. Depending on who comes to power elsewhere, it is likely other crisis nations will follow suit.
Renzi, meantime, is one of several social democratic leaders pushing for relaxation of the E.U.’s tough budget rules, which function as one of the austerians’ principal policy instruments. Not altogether oddly, Ibec, the Irish employers’ association, has effectively joined the party in calling for Dublin to cancel yet another round of severe spending cuts to meet the mandated 3 percent deficit target.
Behind these leaders lies the swell of anti-Brussels sentiment graphically evident in the recent E.U. elections. The other take-home: Neoliberal austerity policies, if they work anywhere, require economies far more resilient than Europe’s at the onset of crisis.