Apr 1st 2015

Signs of Life in the Eurozone

by Nouriel Roubini

 

Nouriel Roubini is CEO of Roubini Macro Associates and Professor of Economics at the Stern School of Business, New York University.

NEW YORK – The latest economic data from the eurozone suggest that recovery may be at hand. What is driving the upturn? What obstacles does it face? And what can be done to sustain it?

The immediate causes of recovery are not difficult to discern. Last year, the eurozone was on the verge of a double-dip recession. When it recently fell into technical deflation, the European Central Bank finally pulled the trigger on aggressive easing and launched a combination of quantitative easing (including sovereign-bond purchases) and negative policy rates.

The financial impact was immediate: in anticipation of monetary easing, and after it began, the euro fell sharply, bond yields in the eurozone’s core and periphery fell to very low levels, and stock markets started to rally robustly. This, together with the sharp fall in oil prices, boosted economic growth.

Other factors are helping, too. The ECB’s easing of credit is effectively subsidizing bank lending. The fiscal drag from austerity will be smaller this year, as the European Commission becomes more lenient. And the start of a banking union also helps; following the latest stress tests and asset quality review, banks have greater liquidity and more capital to lend to the private sector.

As a result of these factors, eurozone growth has resumed, and eurozone equities have recently outperformed US equities. The weakening of the euro and the ECB’s aggressive measures may even stop the deflationary pressure later this year.

But a more robust and sustained recovery still faces many challenges. For starters, political risks could derail progress. Greece, one hopes, will remain in the eurozone. But the difficult negotiations between the Syriza-led government and the “troika” (the ECB the European Commission, and the International Monetary Fund) could cause an unintended accident – call it a “Grexident” – if an agreement on funding the country is not reached in the next few weeks.

Moreover, Podemos, a leftist party in the Syriza mold, could come to power in Spain. Populist anti-euro parties of the right and the left are challenging Italian Prime Minister Matteo Renzi. And Marine Le Pen of the far-right National Front is polling well ahead of the 2017 French presidential election.

Slow job creation and income growth may continue to fuel the populist backlash against austerity and reform. Even the ECB estimates that the eurozone unemployment rate will still be 9.9% in 2017 – well above the 7.2% average prior to the global financial crisis seven years ago. And austerity and reform fatigue in the eurozone periphery has been matched by bailout fatigue in the core, boosting support for a range of anti-euro parties in Germany, the Netherlands and Finland.

A second obstacle to sustained recovery is the eurozone’s bad neighborhood. Russia is becoming more assertive and aggressive in Ukraine, the Baltics, and even the Balkans (while sanctions against Russia have hurt many European economies). And the Middle East is burning just next door: the recent terrorist attacks in Paris and Copenhagen, and against foreign tourists in Tunisia, remind Europe that hundreds of homegrown jihadists could return from fighting in Syria, Iraq, or elsewhere and launch further attacks.

Third, while ECB policies keep borrowing costs lower, private and public debt in the periphery countries, as a share of GDP, is high and still rising, because the denominator of the debt ratio – nominal GDP – is barely increasing. Thus, debt sustainability will remain an issue for these economies over the medium term.

Fourth, fiscal policy remains contractionary, because Germany continues to reject a growing chorus of advice that it should undertake a short-term stimulus. Thus, higher German spending will not offset the impact of additional austerity in the periphery or the significant shortfall expected for the three-year, €300 billion ($325 billion) investment plan unveiled by European Commission President Jean-Claude Juncker.

Fifth, structural reforms are still occurring at a snail’s pace, holding back potential growth. And, while structural reforms are necessary, some measures – for example, labor-market liberalization and pension overhauls – may boost the eurozone’s savings rate and thus weaken aggregate demand further (as occurred in Germany following its structural reforms a decade ago).

Finally, Europe’s monetary union remains incomplete. Its long-term viability requires the development over time of a full banking union, fiscal union, economic union, and eventually political union. But the process of further European integration has stalled.

If the eurozone unemployment rate is still too high by the end of 2016, annual inflation remains well below the ECB’s 2% target, and fiscal policies and structural reforms exert a short-term drag on economic growth, the only game in town may be continued quantitative easing. But the ongoing weakness of the euro – fed by such policies – is fueling growth in the eurozone’s current-account surplus.

Indeed, as the euro weakens, the periphery countries’ external accounts have swung from deficit to balance and, increasingly, to surplus. Germany and the eurozone core were already running large surpluses; in the absence of policies to boost domestic demand, those surpluses have simply risen further. Thus, the ECB’s monetary policy will take on an increasingly beggar-thy-neighbor cast, leading to trade and currency tensions with the United States and other trade partners.

To avoid this outcome, Germany needs to adopt policies – fiscal stimulus, higher spending on infrastructure and public investment, and more rapid wage growth – that would boost domestic spending and reduce the country’s external surplus. Unless, and until, Germany moves in this direction, no one should bet the farm on a more robust and sustained eurozone recovery.



Copyright: Project Syndicate, 2015.
www.project-syndicate.org

 


This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see: www.project-syndicate.org.

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.

 

 

Browse articles by author

More Current Affairs

Mar 19th 2019
Last week, a far-right extremist killed at least 50 people – including a three-year-old child – worshiping at two mosques in the New Zealand city of Christchurch. Neither white supremacy, nor racially motivated terrorist attacks carried out in its name, are new phenomena. Yet the response to far-right terrorism remains thoroughly insufficient.
Mar 12th 2019
Allegations of Russian meddling in the affairs of Western countries have been a persistent feature of Western politics since the Cold War. Claims of Russian interference in the 2016 US presidential election are only the most recent in a long series of suspected conspiracies across the past century or so. But Russian political discourse is also riddled with conspiracy theories. Everything bad that happens in Russia is traced back by some to one or another anti-Russian plot hatched in the West.
Mar 10th 2019
My Soviet school built a mesh fence around its yard. Every week, tardy kids who wanted to cut through the yard tore a hole in the fence. Every weekend, the administration fixed it. But the hole would reappear the morning after. This went on forever. I wish US President Donald Trump, the fence builder of the West, had gone to my school. The Soviet Union was a country of fences, barriers, and walls. Everything was prohibited, locked, and guarded. Warning signs were phrased in no uncertain terms: “Do Not Enter: Death!” “Strangers Are Forbidden.” “The Border Is Closed.” Barriers didn’t stop people from ignoring the warnings. But they complicated things.
Mar 8th 2019

 

WASHINGTON, DC – It seems that every time I write about Donald Trump’s presidency, I pronounce it to be in more trouble than ever. This time is no different: he and his presidency are indeed in more trouble than ever. And yet that may not prevent him from winning again in 2020.

Mar 7th 2019
The Brexit process has exacerbated many of the disunities within the UK’s territorial constitution................polling in England suggests that many people think breaking up the UK is perhaps a price worth paying to deliver Brexit.......... At the referendum, only two of the four component parts of the UK – England and Wales – voted to leave the EU. This was enough to swing an overall UK-wide majority in favour of leave, but it went against the will of the Scottish and Northern Irish electorate. In both these parts of the country, significant majorities voted to remain – 62% and 55.8%, respectively.
Mar 6th 2019
Watching Michael D. Cohen, US President Donald Trump’s former lawyer and self-described “fixer,” testify to the House Committee on Oversight and Reform was a remarkable spectacle to behold. Here was a man who was hired by Trump to behave like a gangster. And he did that to perfection. When The Daily Beast was about to report on allegations by Trump’s first wife, Ivana, that her husband had raped her, Cohen barked at the journalist working on the story: “So I’m warning you, tread very fucking lightly, because what I’m going to do to you is going to be fucking disgusting. You understand me?” That journalist was hardly alone. Cohen’s job was to threaten anyone who got in the way of his old boss. He lied to congressional committees, paid off prostitutes to stop them from talking about their affairs with Trump, and much else. Cohen, who will soon begin serving a three-year prison sentence, has become what Mafiosi (and Trump) call a “rat.”
Feb 27th 2019
Extracts: "Some political catastrophes come without warning. Others are long foretold, but governments still walk open-eyed into disaster. As the possibility of a no-deal Brexit looms, most analysts agree that there will be severe economic and political consequences for the UK and the EU. And yet a no-deal Brexit still remains an option on the table....." ".......Although the consequences of a no-deal Brexit will be much less terrible, there are similarities in certain patterns of thinking and political behaviour, from the few who embrace disaster to the systemic pressures which prevent compromise. Avoiding disaster in 1914 would have required framing the stakes of the July crisis in less zero-sum ways and refusing to rationalise a general European war as an acceptable policy option. It required leaders with enough courage to compromise, even to accept defeat, and for states to offer rivals the prospect of long-term security and future gains in exchange for accepting short-term setbacks."
Feb 25th 2019
US President Donald Trump’s administration has underestimated China’s resilience and strategic resolve. With the Chinese economy slowing, the US believes that China is hurting and desperate for an end to the trade war. But with ample policy space to address the current slowdown, China’s leadership has no need to abandon its longer-term strategy. While a cosmetic deal focused on bilateral trade appears to be in the offing, the sharp contrast between the two economies’ fundamental underpinnings points to a very different verdict regarding who has the upper hand.
Feb 21st 2019
Extracts: "......after three years of referendum-induced turmoil, there is finally a new move, a brave move, by the eight Labour MPs and three Conservative MPs (and counting)......There are no policy announcements, no real statement of principles, and there is no leader or political platform. And yet, this policy-free political movement is of incredible political importance........this is an act of direct action, based on the concept of prefiguration. That is, the actual policy statement at the heart of the formation of this movement is the formation of the movement itself. There is no need for grand policy statements right now."
Feb 21st 2019
There is a fascinating chapter toward the end of Alexis de Toqueville’s Democracy in America titled “What Kind of Despotism Do Democratic Nations Have to Fear?” in which the author attempted something truly extraordinary – to describe a social condition which humankind had never before encountered. We find him trying to put his finger on something which does not yet exist, but which – in his extraordinary political imagination – he was able to foresee with startling clarity.
Feb 20th 2019
From Trump’s very inauguration day speech, written for him by the fascist gadfly Steve Bannon and man still without a prom date Stephen Miller, it was apparent that the 45th president was a constitutional crisis waiting to happen. And now, without our realizing it for the most part, the constitutional crisis is here.
Feb 11th 2019
The first step to defending Europe from its enemies, both internal and external, is to recognize the magnitude of the threat they present. The second is to awaken the sleeping pro-European majority and mobilize it to defend the values on which the EU was founded. Otherwise, the dream of a united Europe could become the nightmare of the twenty-first century.
Feb 7th 2019
Watching a sophisticated democratic society knowingly walk into a predictable and avoidable national disaster is a rare and alarming experience. Most British politicians are well aware that leaving the European Union with no agreement on the post-Brexit relationship will cause enormous damage to their country. They are not sleepwalking into the abyss; their eyes are wide open. A minority of deluded ideologues doesn’t mind the prospect of Britain crashing out of the EU with no deal. A few chauvinist dreamers on the right, egged on by sections of the press, believe that the bulldog spirit of Dunkirk will overcome early setbacks and Great Britain will soon rule the waves again as a great quasi-imperial power, albeit without an empire. Neo-Trotskyists on the left, including Jeremy Corbyn, the leader of the main opposition Labour Party, seem to think that catastrophe will spur the British people to demand true socialism at last.
Feb 4th 2019
We’re off to the races - the 2020 presidential races, that is. Since the beginning of the year, at regular intervals, new candidates have been coming forward to announce their intention to compete for the presidency. Some are interesting and/or exciting, while others frankly leave me scratching my head and asking “What are they doing? How on earth do they think they’re going to be elected?”      
Jan 29th 2019
Extract: "As it happens, on that Friday night when Trump buckled, I was at a restaurant where Pelosi and her husband, Paul, were dining with another couple. When the House Speaker left her table, customers and staff alike applauded her. A waitress standing beside me was nearly in tears. She choked out, “We need someone who will fight for us.” "
Jan 28th 2019
Recognizing that opinion in Parliament is moving strongly against leaving the EU on the terms proposed by May, with a growing number of members even in favor of a second referendum to test whether we should leave at all, some right-wingers have flirted with the idea of trying to close down the House of Commons for a time. They want the government to be able to get its own way without any democratic opposition. It is a sign of their desperation to get Britain out of the EU whatever the constitutional or economic cost. Is May prepared to get to grips with this? If she runs away from the task, despite growing Parliamentary unease about the path we are on, Britain is in big trouble.
Jan 25th 2019
At the end of last year, Russian President Vladimir Putin announced that Russia had completed final testing of an “invincible” new hypersonic nuclear-capable missile, the “Avangard,” calling it “the best New Year gift” for his country. With Putin seeming to up the ante on his increasingly frequent doomsday rhetoric, should the world be bracing itself for a nuclear conflict?................In recent months, popular support for Putin in Russia has declined sharply, with his approval rating falling from over 76% to 66% in the second half of last year. At the same time, a kind of neo-medieval thinking, focused on the restoration of autocratic monarchy and the supremacy of the Orthodox Church, has been gaining prominence in Russia. Putin’s fire-and-brimstone rhetoric may actually reflect the mindset of these fundamentalists, who view nukes as a “practical solution” to the world’s problems.
Jan 24th 2019
Over the past three decades I wrote more than two hundred articles about Israel, envisioning it to be a democratic state, independent and free, a champion of human rights, a force of unity for world Jewry, united in its citizenry, admired by its friends, envied by its detractors, and above all at peace with the Arab states and especially with the Palestinians. My vision about Israel was founded on my deep sense of the Jews’ turbulent and tragic history and their yearning for a home of their own in which to live in peace and security. As the years went by, I became increasingly disillusioned with Israel’s endemic political disunity, its inability to resolve the conflict with the Palestinians, the growing public complacency, the loss of the country’s unity of purpose, and the abandonment of its moral responsibility.
Jan 22nd 2019
China’s strategy for economic growth has been a work in progress since Deng Xiaoping launched the country’s “reform and opening up” in 1978. While the last 40 years of reform have been far from error-free, the government has displayed a willingness to adapt, as well as a capacity for navigating complex transitions, supported by a healthy internal policy debate. But how is China’s development model likely to evolve in the future, as external conditions pose new challenges to economic growth? A defining feature of China’s four decades of reform has been the state’s evolving role in the economy, about which there is still significant domestic disagreement. Some argue that the state – and, by extension, the Communist Party of China (CPC) – must retain a prominent role, in order to uphold the social stability needed to sustain economic development. Others claim that spurring the innovation needed to reach high-income status requires the state to be less like a market participant and more like a referee, regulator, and arbiter of economic and social priorities.
Jan 16th 2019
Consumer studies academics have been picking up on changing habits for a number of years. This includes an increased ambivalence towards consumption itself: people are buying less often and less overall. This is particularly true in the clothing industry, where research shows that millenials are especially unforthcoming – even after you factor in the shift to online retail. A lack of bricks and mortar did not, for instance, prevent online fashion retailer Asos from shocking the City with a profit warning shortly before Christmas. The American car industry is another harbinger of generational change: sales are stalling because younger people seem less interested in ownership. The average age of a new car buyer in the US was 50 in 2015. Or to give one more example, witness Apple’s recent trading problems. People are not only opting for cheaper smartphones, but they are keeping them for longer. If the world’s first company to pass the trillion dollar value mark is showing signs of struggling, we ought to take note.