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Feeble growth in the euro zone

The sick men of Europe

Feb 12th 2010
From Economist.com

A lack of demand in the euro area explains why its economy is hardly growing

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BARELY had the ink dried on a statement by European leaders supporting Greece in its struggle to finance its debts when more bad news emerged from the euro zone. Figures released on Friday February 12th showed that GDP in the 16-country currency zone rose by just 0.1% in the three months to the end of December compared with the previous quarter. That there was any improvement at all was largely down to France, where a burst of consumer spending lifted the economy by 0.6%. In the region’s other big countries, GDP was either flat—as in Germany—or falling, as in Italy and Spain (see chart below).

The main problem is a familiar one: consumers within the euro zone are not spending enough and the strong currency is making it hard to tap demand in the rest of the world. The best hope for a home-grown stimulus is Germany, where firms and consumers had practised thrift when the rest of the world indulged in a spending boom. Sadly Germany still relies too heavily on exports. Consumer spending and investment both fell in the fourth quarter and were it not for a boost from foreign trade, the German economy would have shrunk. This week Axel Weber, the head of Germany’s central bank, gave warning that cold weather could mean that GDP falls in the current quarter.

(The following chart is from Casey´s Daily Dispatch. To enlarge click on : http://www.caseyresearch.com/kkcImages/1266007958-image1.jpg )
Other countries are tapped out. Spain was once a rich source of internal euro-area demand but its consumers are now weighed down by debts accumulated during a long housing boom. The unemployment rate is perilously close to 20% and its rigid jobs markets mean it is unlikely to come down soon. Bond-market pressures mean Spain's government is having to withdraw some of its support to the economy sooner than it would like. The wonder is that Spain is not in a deeper funk. GDP fell by 3.1% in the year to the fourth quarter, not much worse than in Germany.

Those two countries' struggles are two sides of the same coin. Economies that in good times had enjoyed credit-fuelled consumer booms “exported” some of their pain once crisis struck. In Spain and Greece, consumer spending has fallen far more than output, because a lot of discretionary spending had been on imported goods. (This is true also of Britain, an important export market for the euro area.) Foreign suppliers lost orders as well as local firms. Big exporters, like Germany, felt this particularly hard.

France is bucking the dismal trend in part because its state plays a dominant role in the economy. Government spending rose by 0.7% in the fourth quarter, after similar increases in the previous two quarters. France has done well also because it was not party to the euro-zone’s internal imbalances. During the boom it had not relied greatly on foreign credit to fund its growth, as had Spain, nor had it been a big supplier of credit and exports to others, as is Germany. The French economy is large, diversified and more self-contained than many of its euro-zone partners and so has been hurt less by global events. There is a parallel with Poland, the most resilient of the eastern European economies.

Yet France cannot continue to grow quickly. There is some small irony in the French president, Nicolas Sarkozy, arranging a pan-European statement of support for Greece this week. The budget deficit in France was a hefty 8% of GDP last year: France is hardly a model of fiscal rectitude and may struggle to contain its rising public debt. The fiscal crisis in Greece has increased the pressure on other countries to put their public finances in order, which will curb GDP growth across the euro zone. The only bright spot is that the troubles in Greece have brought the euro lower. For a region that now relies so heavily on spending from without, a weaker currency is sorely needed.

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