The euro-zone debt crisis has mutated into Europe’s longest slump of the postwar era – wrote in The Wall Street Journal wrote Marklus Walker and Brian Blackstone – with no recovery in sight for a broad swath of the continent.
Continuing government austerity, banks that can’t or won’t lend and heavy household debts are weighing on many countries. Weak business surveys are challenging official predictions, including from the European Central Bank, that growth will return this year.
The euro zone’s output of goods and services, or gross domestic product, fell in the first three months of the year at an annualized rate of 0.9%, data out Wednesday showed. That was the sixth-straight quarter of a recession that began in late 2011, and puts the region in contrast with other recovering economies. U.S. GDP grew at a 2.5% pace in the first quarter, and early Thursday, Japan said its GDP jumped 3.5% in the quarter. U.K. output rose last quarter as well.
Depression-like conditions in Southern Europe, combined with slowing global growth, are dragging down the core economies: Germany is barely growing and France is steadily contracting.
The 17-nation euro zone, which accounts for 17% of world GDP, remains the weakest link in the global economy, mired well below its level of economic activity before the 2008 financial crisis. Social strains, political paralysis and rising debt burdens are reigniting doubts about its economic future.
The ECB’s recurrent predictions of an imminent recovery are the triumph of hope over wisdom,” said Willem Buiter, chief economist at Citigroup Inc. C +1.66% Euro-zone countries will face a mix of recession and tepid recovery for “two or three more years,” he said.
Though the recession that followed the crash of Lehman Brothers was deeper, the current contraction in Europe has lasted longer. It shows that the euro zone’s medicine of fiscal austerity and its stuttering institutional changes have failed to revive the confidence of companies and consumers.
The sovereign-debt panics of 2010-2012 have abated largely because of actions by the European Central Bank—low interest rates, abundant liquidity for banks and above all, its pledge to prevent the collapse of euro-zone government bonds.
Taken together, these measures have reduced fears that the euro zone will break up and led to strong recoveries in many European financial markets. But buoyant bond and stock markets aren’t leading to a bounce in business investment or jobs.
Borrowing costs for businesses in Spain, Italy and Portugal remain significantly higher than in Northern Europe, impeding investment and job creation.
“Financial markets have become more sanguine than a year ago, but the underlying problems of the euro zone haven’t been fixed,” said Simon Tilford, chief economist at the Center for European Reform, a London-based think tank.
The bleak outlook is driving people such as Roberto Samper to despair.
The 41-year-old Spaniard has found only sporadic work since losing his job in 2009 directing traffic for the city of Madrid. He’s lost count of his fruitless job applications in a country where six million people, or 27% of the workforce, are unemployed. “Some days you awake with a lot of spirit, some days you’re really low,” Mr. Samper says. He says he overcomes an occasional sense of hopelessness by thinking about his 3-year-old daughter, Ilse.
His and his wife’s combined jobless benefits of around €850 ($1,100) a month barely cover their rent and utility bills—and are set to end this year. His family gets much of its food from the Catholic charity Caritas. The family is thinking of moving to London to search for work.
The Spanish and Italian economies shrank at annualized rates of about 2% in the first quarter, according to calculations by J.P. Morgan JPM +2.61% based on official GDP data. The pace was slower than in the fourth quarter of 2012 for both countries. But French GDP contracted at an annualized rate of 0.7%, which was worse than economists had expected.
Germany’s economy grew by an annualized 0.3%, less than expected, partly a result of freezing weather that held up construction activity. Belgium and Slovakia were the only other euro-zone countries to report growth in the quarter.
German consumer spending rose, helped by low unemployment and rising wages. But another fall in German business investment is adding to doubts about the ability of Europe’s largest economy to provide the demand that is badly needed to offset shrinking demand in Mediterranean countries.
Business surveys for April suggest the euro-zone economy could well shrink again in the second quarter.
France’s slide into recession since late 2012 is fueling public discontent and political pressure on President François Hollande, who was elected last year on a promise to turn away from austerity and create growth.
“There is no one in the streets” in the posh shopping district around Avenue Montaigne, says Patrick Lifshitz, who runs three Hobbs Cashmere boutiques in Paris. “The French people have lost all their hopes,” he says. “We live because of the foreigners that come to Paris and buy, because the French don’t buy anymore.”
France is suffering partly from a worsening image, says Stanislas de Bentzmann, co-chairman of technology consulting firm Devoteam DVT.FR +0.11% . “Multinational clients aren’t investing because they see France as hostile to business,” he says. “When you have created that psychology, it is difficult to get the economy going.”
Slowing growth in China is hurting sales at German exporters such as HAWE Hydraulik, an engineering company based in Munich. The U.S. market and Northern Europe are propping up HAWE’s growth, says Karl Haeusgen, the owner. But Spain, which used to be an important export market for the company, is “misery,” he says.
Falling euro-zone GDP and business confidence are likely to increase pressure on the ECB to find new ways to stimulate activity, especially bank lending to the small businesses that are the mainstay of Southern Europe’s economies.
It cut interest rates two weeks ago, but despite low and falling inflation, the ECB has so far proved reluctant to try new policy measures, such as buying asset-backed securities, that might anger people in Germany, which frowns on central-bank risk-taking.
Even if the euro zone ekes out low growth later this year, the medium-term prospects for the region remain deeply troubled.
Southern European countries still have to drive down their wages and other business costs, relative to Germany, to restore their competitiveness. That process, which economists call “internal devaluation,” is slow and agonizing compared with the alternative path, which euro members no longer have: devaluing a national currency.
Faster growth or higher inflation in Germany would make it easier for Spain, Italy and France to regain competitiveness relative to Northern Europe.
But low unemployment in Germany means there is no pressure on German politicians to change their economic policies to boost demand and inflation—either before or after national elections this September.
—Ilan Brat in Madrid and William Horobin in Paris contributed to this article.
Source:
The Wall Street Journal on line May 15th 2013
