Eurozone recovery defies the odds but long-term problems remain

Europe Map

Perhaps it was the warmer winter that spurred economic activity in the eurozone, or maybe confidence was boosted by a financial firewall being erected around Greece to protect against a messy default.

Related: Eurozone recovery hopes boosted as Spain announces GDP rise

In truth both have played a role. But more important than either is the relaxation of austerity by a Brussels elite that is keen for Portugal and Ireland, still both committed to paying back their enormous debts, to cope with political instability and recover quickly.

Some analysts believe the latest batch of eurozone data adds up to a growth rate for the first quarter of 0.5%. It would mean the euro economy grew faster in the first three months of 2015 than the UK (0.3%), and the US (0.25%).

Star of the show is Spain, which is going like a rocket. A growth rate of 0.9% in the first quarter puts it in the same rank as Ireland, which grew by almost 5% last year and is forecast to repeat the performance this year.

Germany is edging ahead faster than was predicted only a few months ago, and many of the smaller states, from Hungary (3.6%) and Lithuania (2.9%) to the Czech Republic (2%) and Estonia (2.1%) pushed ahead at a decent pace during 2014.

Growth in Ireland has brought with it a drop in the unemployment rate and given its coalition government the confidence to start offering tax cuts as a pre-election giveaway.

Another boost came from inflation. After four months of falling prices it edged up to zero last month. Negative inflation seemed to sum up the quagmire that eurozone economies found themselves in – the fact that the currency zone appears to be climbing out of it shows that things are not so bad.

That small rise in inflation comes despite the fall in oil prices continuing to keep living costs down. Energy prices in the eurozone fell by 5.8% in April - a slightly slower pace than the 6% decline recorded in March, said eurostat.

All this good news comes even before the European Central Bank’s €1.1tn programme of quantitative easing has started filtering through from the commercial banks to the real economy.

The ECB said in response to the inflation figures that “longer-term inflation expectations in the euro area have recovered. The decline observed over the previous two years has thus come to a halt.”

But a dark cloud still hangs over the eurozone: unemployment. Even in those countries that are expanding output it remains high. Spain’s stellar growth has only succeeded in cutting the unemployment rate from 25.1% to 23% over the last year (March 2014 to March 2015). In Ireland it dropped from 12% to 9.8% over the same period.

In Portugal it remains at 13.5% and in France and Italy has gone up to 10.6% and 13% respectively over the last year. Across the 28 nations in the EU, the unemployment rate stood at 9.8% in March. That was the same as February but down from 10.4% in March last year, marking a period of stagnation, not growth.

There are also the longer term issues that are often ignored: the ageing of most European societies that are triggering cutbacks in investment, spiralling health costs and commitments from governments that they will provide generous retirement benefits – still largely un-costed.

Ireland, without a change of government, faces another five years of austerity, as do most eurozone countries. Sadly, France and Italy cannot seem to raise their game to escape further Brussels-inspired public spending cuts, dragging heavily enough on growth to potentially keep it near zero for many more years.

Across the Atlantic, the US economy is slowing and in the far east, China is cutting back on easy credit, with knock-on effects for its satellite trading partners. All this makes for a less than rosy outlook and puts the eurozone still at the back of growth league.

Powered by Guardian.co.ukThis article was written by Phillip Inman, for theguardian.com on Thursday 30th April 2015 16.35 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

JefferiesAnd the Best Place to Work in the global financial markets 2016 is...

Register for Financial Markets News Alerts