Eurozone revival beats expectations, but structural, cyclical issues remain

Almost all Eurozone GDPs are still below 2007 pre crash levels.

THE eurozone economy has exceeded the gloomy consensus forecasts that were prevalent 12 months ago, but deep-seated structural and cyclical problems remain.

Morgan Stanley, one of the few investment banks that were optimistic then, continues to predict reasonable growth in 2018. This time, the majority of economists and bankers agree.

The latest data is “indicative of a sustained eurozone economic recovery”, said Oliver Kolodseike, a senior economist at the Centre for Economics and Business Research.

“With the unemployment rate inching down further and wage growth outstripping inflation, consumer spending should continue to support the eurozone economy in the coming months,” he said.

On average, the 18-member eurozone nations grew by 2.6 per cent in most of 2017, according to official statistics.

The fastest growing key nations were Ireland (5.8 per cent), followed by Spain (3.1 per cent), Germany (2.8 per cent), Portugal (2.5 per cent) and France (2.2 per cent).

Growth of Italy and Greece were below the 2 per cent mark, but the good news is that their economies are reviving and not contracting.

Despite the better performance, the sad fact – with the exception of Ireland – is that the gross domestic products (GDPs) of eurozone nations and also the UK are still below the levels seen a decade ago.

That was 2007/2008, before the financial crash. Economies have recovered from the deep recession of 2009/2010, but economic policies have still left problematic economies.

The average eurozone unemployment has fallen from its peak level of 12 per cent, but is still a high level of 8.8 per cent with Greece at 20.5 per cent, Spain at 16.4 per cent and France at 9.7 per cent.These measures were and still are state austerity to reduce budget deficits, quantitative easing (QE) – flooding the financial system and zero interest rates, loan bail-outs and propping up European zombie banks.

Most disturbing is the extent of youth unemployment. Latest figures of the Organisation for Economic Co-operation and Development (OECD) show eurozone unemployment of 15 to 24 year olds at 18.6 per cent, compared with the OECD average of 11.8 per cent.

A youth unemployment rate of 40.2 per cent in Greece, 38.2 per cent in Spain, 34.7 per cent in Italy, 25.6 per cent in Portugal, 22 per cent in France and 14 per cent in Ireland illustrate the impact of austerity.

Even though overall unemployment, youth and, older men and women are lower than recession levels, statistics and anecdotal reports indicate virtually static wage and salary growth.

There have also been wage cuts and growing numbers of part-time employees without the backing of corporate pensions.

Central bank QE in the US, Europe, UK and elsewhere, has also widened inequality between wealthier property and financial asset holders and the poorer employed and unemployed.

Moreover, the flood of money seeking returns precipitated residential and commercial property bubbles. Since 2010, average house prices have risen by more than 25 per cent in Germany for example, according to Moody’s Analytics.

Besides London, properties in Munich, Paris and Dublin, for example, are becoming increasingly overvalued and expensive.

A decade or two ago, young people could purchase apartments and with growing families, larger houses. Without the help of wealthy parents, prices are generally beyond them. Rents are high and absorb a large percentage of disposable income.

QE has also generated speculation in commercial properties in cities including Berlin, Paris and Madrid.

Prices are now well above their 2007 peaks, according to Fidelity. This raises the rateable value and places pressure on shops and other businesses.

Given the insecurity of both young and old middle class, poorer and unemployed younger and older people, it was unsurprising that populist extreme right and left parties gained ground in German, French, Dutch and Austrian elections this year.

Brexit, of course, was the biggest shock and is also the biggest risk for both the UK and the European Union.

Given that it is partly to blame for the current economic dislocation via its QE programme, it is ironic that the European Central Bank lists the following potential risks to the eurozone economy.

These are:

  • volatility in global bond and equity markets “may sow the seeds for large asset price corrections in the future”;
  • non-performing loans and poor profitability of a large number of eurozone banks;
  • concerns about “elevated” sovereign and private debt levels;
  • and increased risk taking of pensions and other investment funds.

On the good news front, growing numbers of European companies are innovating through technology and these sectors are employing more people.

© copyright Neil Behrmann

© copyright Neil Behrmann

This article was first published in The Business Times, Singapore.

Neil is author of anti-war children’s novel Butterfly Battle- The Story of the Great Insect War. The updated 2015 Waterloo commemoration version of Butterfly Battle is on Kindle and e-books. Jack of Diamonds Neil’s thriller on global diamond mining and smuggling, will be published in coming weeks. It is the sequel to the thriller, Trader Jack, The Story of Jack Miner. Book reviews are on neilbehrmann.net and Amazon and more reviews are welcome. If the books are purchased direct on this site, a proportion of the proceeds will go to low cost charities.

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