Eurozone dodges triple-dip recession but submerges in 'lost decade'
Italian ex-minister warned that “Titanic Europe” is heading for a shipwreck, demanding an “orderly break-up” of the euro unless there is a radical change of course
By Ambrose Evans-Pritchard, International Business Editor
4:33PM GMT 14 Nov 2014
The eurozone has averted a triple-dip recession but remains stuck in a deep structural slump, with too little momentum to create jobs or to stop a relentless rise in debt ratios.
“It flatters to deceive,” said Marc Ostwald from Monument Securities. “France was basically horrible. How anybody could celebrate this as a recovery story is beyond me.”
“A close reading of details is sobering. Just about all the drivers of growth are near-dead,” said Denis Ferrand, head of the French research institute Coe-Rexecode.
Michel Sapin, the French finance minister, said the economy remains "too weak" to make a dent on unemployment. France’s brief rebound in employment has already sputtered out. The economy shed 34,000 jobs in the third quarter. This will not be easy to reverse since Paris has pledged to push through a further €50bn of fiscal cuts over three years to meet EU deficit targets.
Maxime Alimi from Axa said France’s public debt is likely to reach 100pc of GDP by 2017, warning that investor patience may not last. He said bond yields could rise in a “non-linear, abrupt fashion” in the next downturn.
Europe is caught in limbo. The data is not weak enough to force a radical change in EMU policy, whether that might be a ‘New Deal’ blitz of investment or full-fledged quantitative easing by the European Central Bank.
The risk is that the currency bloc will drift into another year in near deflationary conditions, without any catalyst for real recovery. The US Treasury Secretary, Jacob Lew, warned this week that Europe faces a “lost decade” unless surplus countries such as Germany do more to stimulate demand.
“The eurozone is the epicentre of a global Keynes liquidity trap,” said Lena Komileva from G+Economics. “For the markets, the previous consensus of a periphery-led recovery has crumbled.”
Germany just scraped by without falling into a technical recession, growing 0.1pc after contracting by 0.1pc in the previous quarter. It is clearly suffering the brunt of Russia’s crisis and wilting demand in China, Brazil, and much of the emerging market nexus.
Jörg Krämer, chief economist at Commerzbank, said there was a surge of pent-up investment by German companies after the EMU debt-crisis subsided in mid-2012. This has faded, causing a “soft patch” that is coming to an end.
“We expect German growth to pick up next year. The depreciation of the euro against the dollar will lift GDP by at least 0.5pc over the next four quarters. On top of that, monetary policy is very loose for German conditions,” he said.
Any German recovery will have a double-edged effect. It will boost intra-EMU trade demand slightly, but it will also engender even more resistance from Berlin for fiscal stimulus or for sovereign bond purchases by the ECB. The net effect might be negative for those parts of southern Europe still trapped in debt-deflation.
Italy is now the country in deepest trouble, stuck in a fixed exchange rate system with a currency overvalued by at least 25pc. Output has fallen by almost 10pc since the peak, reverting to 1999 levels. Industrial output is down 24pc. Official youth unemployment is 42.9pc, but Italy also has the highest level of unreported jobless in the eurozone, according to the European Commission.
Italian industrial output
This is a deeper slump than during the Great Depression, and is almost certainly the worst episode in peacetime since the creation of the Italian state in 1859. An “internal devaluation” to claw back competitiveness is impossible in near deflationary conditions, since this would aggravate debt dynamics.
Italy’s public debt ratio is already rising at a rate of 5pc of GDP each year despite a primary budget surplus of 2.5pc. The debt stock is rising on a base of contracting nominal GDP, a poisonous dynamic known as the denominator effect.
A study by the Brussels think-tank Bruegel concluded that Italy must increase its primary surplus by 1.4pc of GDP for every 1pc drop in the inflation rate just to keep pace, a near impossible task.
“The data for the eurozone are awful,” said Simon Tilford from the Centre for European Reform.
“It is a sign of just how bad things have become that Europe’s leaders will jump on any glimmer of hope to justify policies that they still cling to doggedly. But the fact is that output is still several percent short of where it was in 2008, and massively short of where it should be.
Moreover, we have probably passed the cyclical peak already,” he said.
“The electorates in Italy and Spain have been stoical so far, but this is predicated on the belief that things will get better. There is a false sense of complacency about what will happen if this depression goes on for year after year,” he said.