The upward trend in activity in the Euro Area gathered pace in the last quarter of 2013. 0.3% GDP growth (1.2% annualized) on the previous quarter prolonged the improvement observed since spring.
The long period of decline in activity that was recorded from spring 2011 to the first quarter of 2013 appears to be over.
The first chart shows the GDP profile in the Euro zone countries since 2006. It is clear that at the end of the period there was an upturn in the trend in most countries. However, on average, these profiles follow a moderate pace. Meanwhile, GDP in the Euro zone and most countries is still below their pre-crisis level (I took the first half of 2008 as a reference).
This chart shows very different trends among the Euro Area countries. Germany is growing faster than all the others. It is followed by a group comprising Austria, Belgium and France for which GDP is now back at pre-crisis levels. GDP for the Euro zone and that of the Netherlands come next. Lastly, a group of countries that were weakened by the crisis: Spain, Portugal, Ireland, Italy and Greece.
We can see that, despite the healthy results posted in 2013, particularly in Spain and Portugal where there was a significant upturn in activity, GDP levels are still very low, well below those recorded before the crisis. If Italy recovered its growth rate prior to the crisis (1.1% for the period from 2000 to Q2-2008) it would take over eight years to get back to the level of the first half of 2008.
This chart also raises a major question about how the Euro Area works. The adjustment, followed by a very swift improvement in Germany, much faster than the improvement observed in the other countries, suggests an asymmetry in the global adjustment process. While Germany was not restricted by its environment, conditions for the other Euro zone countries continued to be very restrictive, and they were therefore unable to adjust their levels of activity as quickly. The unbalanced way the Euro zone works is brutally clear from this chart. One cannot help thinking that monetary conditions are not sufficiently accommodative to drive a quick return to growth in most countries. Due to the austerity policies, room for maneuver in peripheral economies was practically non-existent except by sacrificing their own domestic growth. This is what they did, with a very persistent effect, as seen in Italy.
While monetary conditions were probably not a constraint for Germany, all the other countries were slow to adjust or still have not done so because it would be more desirable to be able to transfer the risk to the central bank through a liquidity-providing operation. Since the ECB does not have the status of a lender of last resort, it cannot provide long-term help to countries in difficulty. Each country has kept its own risk in its “balance sheet” as it was not able to transfer it (to the central bank) This has not help to hasten the recovery
The period preceding the crisis featured uneven performance among countries, as does the period following the crisis. There is still no safeguard in place to limit these discrepancies, which are not sustainable in a monetary union. A coordinating body is required.
The second chart compares the growth figures since 2010 with those witnessed before the crisis. (To make the chart easier to read, I did not take 2008 and 2009 into account)
The high rate of growth in 2010 and 2011 was the result of the stimulus policies launched at the end of 2008.
2012 and 2013 were catastrophic years, reflecting the impact of the sovereign debt crisis in the euro zone and the implementation of a very harsh austerity policy. This observation should encourage a more relative view of the modest rebound at the end of 2013. There was no swift, substantial trend reversal pointing to a fast convergence towards full employment or a high rate of job creation.
It can also be noted that the rates of growth witnessed in 2013 were still very far off those recorded before the crisis. If this outlook does not improve quickly, there will be no improvement in the labor market except to emphasize the substitution of labor for capital as can be seen in the UK through a rapid decline in real wages. (For those who are interested, see here)
The pleasant surprises at year-end are also modest compared with the figures coming out of the United States and the United Kingdom. On the other side of the Atlantic, non-annualized GDP growth was 0.8%, i.e. almost three times the growth posted in the euro zone (the exact figure being 0.28%). In the United Kingdom, the figure was 0.7%.
Accordingly, carry over growth was strong in the U.S. and the U.K. (1.3% and 1.1%, respectively) vs. 0.35% in the Euro zone. The starting point in 2014 is much lower in Europe.
The table below shows that this delay affected all countries including Germany and, as a result, growth is only 0.6%.
The table in pdf format is here: GrowthEA-2013
The euro zone is gradually emerging from its long period of recession, albeit with lingering low growth rates and significant imbalances.
The challenge is therefore to leverage the global economic cycle that mainly features rapid growth in international trade. Economic policies are currently limited. It is difficult to forecast or to expect fiscal stimulus policies, while the monetary policy has exhausted a huge proportion of its response capabilities (see here for more details)
In other words, economic policies are no longer able to provide strong support in the event of a negative shock (see my paper entitled “The European economy on a knife edge” here)
Therefore, there are two issues:
1 – If the rate of growth does not increase, there is a risk that we will see imbalances (particularly with regard to budgets) resurfacing and casting fresh doubts about the situation and the viability of the Euro zone.
2 – Due to the adjustment in the Euro Area (see the mechanism here) and the high exchange rate of the Euro that limits the ability to leverage world growth, the risk is deflation.
This should involve a willingness to push the value of the euro down in order to prevent the imbalances shown in the first chart and to better equip the economy to leverage the global economic cycle. Euro zone products must be made more attractive and each economy must be allowed to adapt its performance in order to take advantage, and increase the benefits, of the global economic cycle. This requires more cooperation and coordination in the Euro zone and a more balanced monetary strategy.