By Roger Bootle | Telegraph
It is not widely enough recognised that the UK is the eurozone’s largest single
export market’, writes Roger Bootle
During the past few years it has been usual for both investors and
commentators to assume that the eurozone is mired in depression, with little
or no prospect of escape. But is this still true?
Not according to the gross domestic product (GDP) figures for the first
quarter of the year. As I have noted before, Q1 was notably weak in several
parts of the world, including the UK, China and most of the emerging
markets. According to figures released on Friday, the US economy even
contracted. By contrast, the eurozone registered quarterly growth of 0.4pc.
It was particularly noteworthy that France managed to grow by 0.6pc, double
our disappointing 0.3pc rate.
In fact, some sort of recovery in the eurozone this year should not be so
surprising. It has four things going for it. First (Other OTC: FSTC - news) , along with most of the
developed world, it has benefited from lower oil prices, which have reduced
costs and put money in consumers’ pockets. Moreover, unlike some other parts
of the world, especially the US, the expansionary effects from lower oil
prices have not been significantly offset in the short run by the hit to the
domestic energy-producing sector. The countries of the eurozone produce
virtually no oil or gas.
Second, the eurozone has been able to benefit from last year’s recovery in the
US and the UK. It is not widely enough recognised that, as well as the
eurozone being the UK’s single largest export market, it returns the favour.
That’s right: we are the eurozone’s largest single export market. So the
recovery here has also boosted the eurozone’s recovery through higher
exports (that is, our imports).
Third, after the launch of quantitative easing (QE) in March, there has been a
massive injection of liquidity €60bn per month, and set to continue at
that level until September next year. Even if this achieves nothing
directly, bearing in mind all the hype, it should at least help to boost
confidence.
Fourth, partially linked to the launch of QE but also connected with other
factors, there has been a sharp drop in the euro exchange rate. Over the
past year, on a trade-weighted basis it has fallen by about 12pc. Against
the pound, it is standing close to a seven-and-a-half-year low. So some of
the eurozone’s recent comparative economic strength has been due to its
taking market share from other countries, including our own.
But is the eurozone likely to build on this recent recovery? I doubt it.
Actually, more up-to-date information from April and May has already started
to suggest a bit of a slowdown from Q1’s reasonable growth. According to the
surveys, business and consumer confidence have dropped back a bit. That
would not be surprising. Across the euro area, wage increases remain very
low. Once the one-off boost to real incomes caused by lower oil prices has
passed through the system, the rate of growth of real earnings should fall
back. And, outside Germany and a few other northern core countries, the rate
of unemployment remains appallingly high.
It seems clear that QE will continue for a good while yet and this will be
helpful at the margin. But just as I always doubted that QE was a
transformative influence in the US and the UK, so I doubt its power in the
eurozone. Insofar as it has caused the exchange rate to drop, it has boosted
demand. But I doubt that it can do much more.
And whether the boost from the exchange rate will endure is anyone’s guess.
Currencies have a habit of bouncing around unpredictably. Surely the euro is
at or very near its limit against the pound? And you have to wonder whether
the dollar has become too strong for its own good. A 10pc rise of the euro
would do a good deal of damage to the eurozone’s export performance. This
could happen as an indirect result of dollar/pound weakness, perhaps tied to
a revision of the markets’ views on interest-rate prospects. Alternatively,
it might happen as the result of some new development in the EU’s continuing
identity crisis perhaps connected with the UK’s impending referendum.
The fundamental problems of the eurozone remain essentially unaltered. The
countries of the southern periphery are still caught in a trap of the euro’s
making. Uncompetitiveness, fiscal austerity and high unemployment combine to
produce anaemic growth at best. True, Germany and the Netherlands continue
to do fairly well. But they also continue not to spend their full whack. The
result is that Germany runs a current account surplus of 7.5pc of GDP, with
the equivalent figure for the Netherlands being more than 10pc.
Meanwhile, the running sore that is Greece drains confidence. At some stage
pretty soon, there is going to be a Greek “event”. Whether it takes the form
of an outright default hardly matters. Actually, given that the players
involved are Greece and the EU, whatever happens is unlikely to be
straightforward. Even if Greece does not make its next payment to the IMF,
which has widely been described as a default, in fact this is likely to be
classified as a “missed payment”. Greece would have a period of some months
before this became classified as a default good and proper.
It is one thing to be in the dark about whether Greece is going to default and
leave the euro, but it is deliciously ironic that, even after the event, we
may not know for some time whether Greece has “defaulted” or not.
Of course, anxiety about the Greek financial situation is holding back the
Greek economy. Indeed, despite the eurozone’s pick-up in Q1, the Greek
economy actually contracted. But across Europe the Greek situation is having
an effect as people watch and wonder about the stability of the euro, the
robustness of the banks and their own financial security. Perhaps this is
the reason for the softening of confidence across the eurozone revealed in
the April and May surveys.
The upshot is that in 2015 the eurozone should register its best performance
for several years. It should grow by about 1.5pc. But don’t be fooled into
thinking that this means the eurozone’s economic crisis is over. Growth
could easily fall back next year. Only when southern Europe can break free
from its shackles, Germany spends its money and France reforms will the
economy recover to full health.
Roger Bootle is executive chairman of Capital Economics. The paperback
edition of his bestselling book, The Trouble with Europe, has just been
published by Nicholas Brealey. To order your copy, call 0844 871 1514 or
visit books.telegraph.co.uk
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