Phew! Europe is growing again. Yes, I know that according to the official statistics the UK is not yet part of that growth but the more I look at the other data the more convinced I am that our stats are wrong and that eventually it will be shown that some growth began in Britain in the third quarter. But we will see. The more important point is that most of the economies of this time zone are moving forward again. That gives a base from which to think about the coming months. What have we learnt and what should we look for?
The first message I would take from the results from Eurostat, the statistical office of the European Commission, is that the similarities between the major countries are much greater than the differences. It is true that France has had a rather less serious dip than other large economies, most notably Germany, Italy and the UK. Greece has done not too badly either. But French unemployment is exceptionally high and is forecast by the OECD to reach 11.2 per cent next year. Youth unemployment is high too. As for Greece, it has the most serious current account deficit in the eurozone and is also running into criticism for its fiscal policies.
So I think it is more important to focus on the big story rather than trying to slice the nuances. The big story surely is that in round numbers the main European economies are down between 2.5 and 5 per cent year-on-year. That is dreadful whatever gloss you seek to put on it. But – and this is equally important – I have yet to see a single forecast for any major economy that suggests there will not be some growth in 2010. We are not through this sorry tale by any means but just as there was a clear financial turning point in the spring, now there has been an equally clear economic turning point too.
It is totally unscientific but it is worth noting that just as the equity markets collapsed last summer and autumn some months ahead of the plunge in economic output, so they recovered from March onwards, again some months before the recovery was evident. It would be silly to ascribe this to superior wisdom but it is worth observing that it typically occurs during economic cycles that the markets turn three to six months ahead of the economy. They have proved yet again that they are a leading indicator of sorts.
If that is lesson one, lesson two surely is that most of the major economies have managed to stumble through this downturn with less destruction to employment than one might have thought given the collapse of output that has occurred. There have been disasters. Countries that have seen a particularly serious house price collapse have seen the sharpest rises in unemployment. The rise from the trough to the present is more than 11 percentage points in Spain and more than 8 percentage points in Ireland. By contrast in Germany, where house prices have been flat for at least a decade, the rise in unemployment has been less than 1 percentage point.
So if you have a housing bust and the associated collapse of the construction industry, you are going to have a big rise in unemployment. That is a sad inevitability. But if you look at Germany or indeed the UK, while unemployment has risen, it is clear that companies have made a huge effort to hold on to staff if at all possible. The UK labour data last week showed that employment actually rose during the past three months. True, that was the result of the rise in part-time jobs being greater than the loss of full-time ones, but that in a way is positive because if people are kept in part-time work it is easier to bring them back to full-time jobs as demand recovers.
It is too early to be able to dig into the data and find the answer, but the question that really does need examining is whether service industries are more flexible in their employment patterns than manufacturing industries, and if so what we should learn from that. In an uncertain world, having a flexible workforce provides huge advantages, not just in terms of skills but also in terms of the hours worked. You might say that this transfers risk from employer to employee but if it results in higher employment overall then surely that is a price worth paying. Better to have a part-time job than no job at all.
If that is the way labour practices are going – more part-time working, more self-employment, maybe more choice on the part of the worker – then big changes will have to be made in labour legislation. We will have to fit the legislation to the reality of the evolving labour market, not to the labour market of 20 years ago.
What should we look for next? The data will continue to unfold and I suppose from a British perspective there will be obvious interest in the official figures for the final quarter. But they won't come until January and between now and then we will have had the pre-Budget report and the new Treasury forecast.
For continental Europe, the issue that seems to me to be the most important is whether consumer spending will show a self-sustained rise. Germany is the key here. The newly confirmed Chancellor, Angela Merkel, has promised tax cuts to boost demand. That is a marked shift in policy in macro-economic terms because it signals a more relaxed approach to the fiscal deficit. But it is a shift in political direction because it makes the assumption that tax cuts are more effective in boosting demand than higher public spending. If it is successful, pressure will be placed on other European economies, including our own, to go down that route. The trouble is that we don't have the leeway that Germany has to cut taxes and will instead have to put them up.
There is a broader point here. I suspect that when, in three or four years' time, we look back on this downturn it may be that Germany will emerge as the European country that has coped best. It has, to be sure, been particularly hard hit by the collapse in demand for its top-end exports but that is now recovering along with global demand more generally. It has a stronger fiscal position than other major European countries, or at least a less weak one, and if it can now boost demand through tax cuts, other EU nations will have to sit up and take notice.
The long-term financial problems of Europe are as daunting as ever: in particular the declining workforce having to support the growing army of pensioners. As growth recovers, the focus of policy will shift from crisis-management to coping with the fiscal catastrophe. But we should celebrate that growth in Europe has returned, for that is an essential precondition for coping with the pressures ahead.Reuse content