The latest data from the eurozone point to a deepening downturn. Spain confirmed that its economy shrank in the first quarter and Greek retail sales volumes slumped by 13% year-on-year in February. The latest national surveys of manufacturing activity show activity shrinking across the zone. March saw the strongest monthly rise in German unemployment in almost two years. There were street protests against austerity across the eurozone on May Day.
What the commentators said
The recession is now “metastasising out from the euro area periphery to the core”, said Jeremy Warner on Telegraph.co.uk. The figures will “strengthen the hand of those who… urge the current eurozone austerity programme to give way to an overtly pro-growth agenda”.
It has become increasingly evident that in the absence of solid growth to temper the impact of austerity, belt-tightening leads to a “spiral of cuts, recession, and more cuts”, said The Independent. Hence the recent shift in the political wind led by France’s François Hollande, who has called for the fiscal compact to be supplemented with growth-orientated measures. The collapse of the Dutch government after one coalition partner baulked at further budget cuts has also fuelled the debate.
However, as European Council president Herman Van Rompuy warned this week, “some people… are creating the illusion that a pro-growth policy is easy”. The “traditional Keynesian remedy of turning on the government taps is simply not available”, said The Independent. “Any softening of deficit-reduction plans will cause panic in the bond markets.” Some have called for Europe’s core to up borrowing and thus help boost the south.
But even on the unrealistic assumption they would be willing to try it, the few remaining triple-A-rated states haven’t got much room to run up more debts, said Gideon Rachman in the FT. Witness the market reaction to the Dutch failure to agree a budget last week.
The key to growth is structural reform, such as liberalising inflexible and bureaucratic labour markets. Red tape has got so bad in Greece that an entrepreneur was forced to provide a stool sample when he applied to open a business.
But these reforms will take time to work, and structural change usually involves short-term pain. Moreover, Germany is highly unlikely to put up any more money to alleviate others’ debts. It is also loath to countenance potentially inflationary money-printing – which as we have seen elsewhere does little to boost growth long term. The underlying problem, said Capital Economics, is that the countries in trouble need to win back the “vast amounts of competitiveness” they have lost as euro members if they are to improve their growth prospects.
But the traditional way of doing this – letting the currency drop to bolster exports and spur inward investment – is impossible without a national currency. So that leaves painful wage and price restraint as the way to become more competitive. But that leads to the austerity spiral. In short, the real path to growth is through exiting the eurozone. That is why this “misbegotten project”, as The Times put it, looks doomed in its current form.