It was the sad ‘privilege’ of the PIIGS, mostly the Southern European countries to suffer declining growth rates and high unemployment. Since yesterday, when Eurostat released its GDP estimates for the first quarter of 2013, it’s now the whole eurozone, the block of 17 countries using the euro as their currency, and even the entire European Union (27 countries) that are concerned.
GDP fell by 0.2% in the eurozone (0.1% for the EU) compared with the previous quarter, but most importantly, it fell by 1.0% (0.7% for the EU) compared with the same quarter of the previous year. To make things worse, this is the sixth consecutive quarter of decline, the longest recession period in the history of the eurozone.
This sharply contrasts other developed economies, such as the US where GDP rose by 2.5% in the first quarter, Japan and its spectacular 3.5%, following the recent U-turn by prime minister Abe’s government in monetary policy, and even, but more modestly, the UK.
If we look closely at the figures, the situation is catastrophic in the Southern European states under bailout, where the output of products and services produced shrank by 2% in Spain, 2.3% in Italy, 3.9% in Portugal, 4.1% in Cyprus, and a spectacular 5.3% in Greece. The Netherlands show a contraction of 1.3%, and Germany a more modest 0.3. Unemployment in these countries has risen to unprecedented levels (27% in Spain), with youth unemployment reaching above 60% in Greece and Spain. Another problem is the borrowing costs for businesses (especially small and medium enterprises) which remain significantly higher in the south of Europe than in the Northern member states. When asked about this issue, in a recent interview, Mr. Jens Weidmann, the Bundesbank President, seemed to underestimate it and merely referred to the European Investment Bank (EIB) which, in his words, “has better tools to address the problem.”
As for France, where the publication of figures coincided with the completion of one year since President Hollande was elected, it has a 0.4 decline of its output, amid rising unemployment, and a contraction of purchasing power, for the first time since 30 years. Pessimism in France is widespread, mostly as a reaction to the unfulfilled promises of Mr. Hollande who posed himself as a fervent proponent of growth policy, who had defined himself as the ‘anti-Merkel’ candidate during his election campaign.
Hopes for recovery are now only pinned on external demand, but with China’s expected slowdown and the US on a path to increasing taxes, this is far from being a viable option. To sum up, Europe is at a crossroad and has to take a decision; it’s either going to speed up its long-awaited structural reforms, or enter into a large scale American-style ‘quantitative easing;’ or both. The problem is that the first option stumbles on unions’ reaction and other vested interests and thus faces sheer social opposition, while the second option clashes with a deeply rooted conservative mentality – it would certainly give the shivers to Mr. Weidmann and his colleagues. Meanwhile, facts are stubborn things…