Germany Does Heavy Lifting; Eurozone Avoids Recession
Europe dodged a bullet Tuesday after the economy of the 17 countries that use the euro narrowly avoided a recession in the first quarter of the year despite a raging debt crisis that’s raising the specter of the breakup of the currency union.
There was one reason why the eurozone avoided an overall recession — officially defined as two consecutive quarters of negative growth. Germany, Europe’s biggest economy, was behind the better-than-expected performance as strong export figures helped it grow by 0.5 percent — equal to the U.S.’s economic performance.
“The euro area might have dodged recession, but it is firing on only one cylinder,” said James Ashley, senior European economist at RBC Capital Markets.
Huge economic disparities exist across the single currency bloc. Of the euro’s 17 members, seven are in recession: Ireland, Greece, Spain, Italy, Cyprus, the Netherlands, Portugal and Slovenia.
Though Eurostat, the EU’s statistics office, revealed that the eurozone posted flat output in the first quarter — against expectations that it might actually slip into recession with a 0.2 percent decline — there are growing concerns that the months ahead will be as difficult as any the currency union has faced since its creation in 1999.
The political turmoil in Greece has ratcheted up fears of a disorderly debt default that could lead to the country’s exit from the single currency and set off a chain reaction of contagion across the eurozone economy.
For many, including the left-wing Syriza party in Greece which stormed to a shock second in last week’s general election, the answer rests on abandoning austerity — government programs that cut government spending, wages, welfare payments and jobs.
These cuts and reforms were introduced by countries including Spain and Italy when their borrowing costs on bond markets started to rise to unmanageable levels — a sign that investors are nervous about the size of their debts relative to their economic output.
Austerity is intended to address this nervousness by reducing a government’s borrowing needs. However, the concern among many in Europe is that these cuts have choked off any hope of economic growth. That matters because without growth, debt burdens can get worse even at a time of huge cuts.
French President Francois Hollande heads to Berlin later Tuesday and is expected to press the case for a more growth-friendly approach to the debt crisis when he meets German Chancellor Angela Merkel. Kickstarting economic growth was a central plank of Hollande’s electoral platform, not just in France but across Europe as a whole.
Growth-friendly measures include reducing red tape for small businesses, making it easier for workers to find jobs across the eurozone and breaking down barriers that countries have created to protect their own industries. Some economists go a step further and say governments should actually increase spending while economies are so weak — and make reining in deficits a longer-term goal.
“It seems unlikely that anything tangible will come out of the meeting though it seems likely that the subject of growth and fiscal discipline will be on the agenda given the French President’s comments on the subject in his election campaign,” said Michael Hewson, markets analyst at CMC Markets.
Merkel, who has led Europe’s response to its mushrooming crisis over the past couple of years, has preached a cocktail of austerity and economic reforms as the only viable and long-lasting route out of the debt morass.
Greece, which is currently without a government and appears on course for another general election in June following last week’s inconclusive poll, saw its economy contract by an annual rate of 6.2 percent, slightly better than the 7.5 percent decline recorded in the previous three month period. The Greek government agreed to a harsh austerity program in order to qualify for an international bailout.
The figures are subject to change as Eurostat continues to collect figures. Several countries, including Ireland and Slovenia, have yet to release quarterly figures and for Greece there are only year-on-year comparisons.
Reported by Pan Pylas