Such is the gloom that has descended on the eurozone in the past few months, there was a fear that the data from the eurozone’s two biggest economies could have been worse.
That’s true. Germany might now be in technical recession had the 0.1% contraction in the second quarter been followed by a further fall in gross domestic product in the third. As it was, growth of 0.1% was eked out.
Similarly, France’s 0.3% expansion was a tad better than feared. But the headline growth number disguised underlying weakness. The growth was entirely due to government spending and the build-up of unsold stocks of goods. The private sector in France remains painfully weak.
What’s true of Germany and France is true of the 18-nation eurozone as a whole. Unlike the US and the UK, the eurozone has never really shown signs of emerging strongly from the financial crisis and recession of 2008-09. The recovery that began in 2013 has petered out.
There are a number of reasons for that. The European Central Bank has been slower than the Bank of England and the Federal Reserve in taking action to boost growth – and less imaginative in its choice of weapons. Quantitative easing is now in the offing for the eurozone – almost six years after it was deployed in Britain and America.
Blanket austerity for the eurozone has weakened domestic demand. Attempting to slash budget deficits before growth returned has been a terrible mistake, and one for which Germany has to take the blame.
With consumers not spending and businesses not investing, the eurozone has been dependent on exports to keep growth ticking over. But the slowdown in some of the world’s leading emerging markets this year – China, Brazil and Russia to name but three – has made it harder to sell goods overseas. Internal eurozone trade has also faltered.
All is not completely lost. The plunge in oil prices will reduce energy bills and boost the real disposable incomes of consumers. A sharp fall in the value of the euro will make exports to the rest of the world more competitive. And strong growth in the US and the UK will allow eurozone countries to sell abroad those goods for which there is little demand at home.
But policymakers are deluding themselves if they believe that narrowly avoiding recession is the same as being on the road to recovery. The eurozone today is starting to look worryingly like Japan in the 1990s: little growth, crippled banks, export dependent. All it lacks to make the comparison complete is deflation, and one further negative shock would make that a reality too.
It’s clear what the eurozone needs. It needs monetary activism from the ECB. It needs fiscal activism, both from individual countries and from pan-European institutions such as the European Investment Bank. It needs Germany to realise that generalised belt-tightening has been self-defeating. And it needs all those things fast.
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