In Europe, the gap between core and fringe seems to yawn ever wider. The fringe is back in the public eye and for a host of dismal reasons. We have had a week of rising spreads on the debt of the weaker Eurozone countries, with the gap between what Ireland has to pay to borrow for 10 years now around 4 percentage points higher than that for Germany. There were concerns that the Portuguese government was failing to meet its deficit reduction target, given that it is the only country in the Eurozone that, so far, is running a larger deficit this year than it was last. Unemployment in Spain is still rising from its dreadful 20 per cent level. There are new worries about the extent to which Greek banks are having to rely on funding from the European Central Bank to stay afloat. The list goes on....
By contrast, core Europe, most particularly Germany but also the Netherlands and to some extent France, are doing all right. German businesses remain very optimistic, and not just the manufacturing sector which has been doing well on the back of export demand. Retailers are brightening at the prospect of consumers at last spending more, after a decade of very little rise in living standards. As you can see from the first graph, which shows the results from surveys done by the Ifo Institute, the expectations of manufacturers are back to a typical peak level, but retailers are more optimistic than at any time since unification of the two Germanys back at the beginning of the 1990s.
What should we make of all this? Is the Eurozone still threatened, as it was earlier this year? Might the double-dip, feared here in the UK, actually be more evident in the fringes of the Eurozone? And what would be the consequences of that?
Several points. The really good news is that German consumption may be on the rise. The country is of course Europe's largest economy, as well as the world's second largest exporter, having been toppled from pole position last year by China. But consumption has been weak for two decades and the country first had to absorb the costs of unification and then cope with entry into the Eurozone at an overvalued rate.
Now that long period of relative austerity may be over. The country will not go on a mad spending spree, nor will the long-term growth trend rise much. But even a 1-2 per cent increase in consumption will help pull the rest of Europe along. It will also come at the right time for Germany itself. I have just been looking at some work by Citigroup which argues that rising consumer demand will offset any slackening in demand for exports. We will get some consumer confidence figures tomorrow, but it would be surprising if they don't confirm the upbeat attitude of the German retailers.
A couple of other things are happening in the next few days. France produces a budget on Wednesday, which is expected to tighten to fiscal policy by around 1 per cent of GDP. That will highlight the "there is no alternative" perception for what the weaker countries have to do. There are also this week some broader EC-wide confidence figures, which are expected to show a falling back, confirming that Europe taken as a whole faces a period of slower growth. We will hear more too about how well the Spanish austerity budget, outlined on Friday, is being received.
So the pattern of autumn seems set. On the one hand there will be continuing poor economic news from the weaker countries and continued pressure on them to impose yet more austerity on their people. And on the other it will seem that the strong (and the fiscally virtuous) will be reaping the reward for their previous caution. You can be harsh and say that Ireland, Greece, Portugal, Spain and the like should not have allowed their booms to get out of control: that it is literally payback time. But quite aside from the fact that no one from Britain has any moral authority to criticise, given what our own government did, I am not sure this current despair about the European economy is quite justified.
The principal reason for saying that is that Europe is successfully adjusting. That is certainly true outside of the Eurozone. Sweden has come through the recession in good shape, with the prospect of growth of 4 per cent now. The electorate justifiably rewarded its centre-right coalition for its stewardship by giving it a second term in office, albeit as a minority government. Eastern Europe, taken as a whole is adjusting, with the largest economy of that region, Poland, coming through the downturn without dipping into recession at all. The UK is correcting its fiscal errors, which has generated wall-to-wall comment, but is also creating hundreds of thousands of new jobs, which has not received nearly enough attention. Most important of all, the point noted above, Germans are at last increasing their consumption, which hugely helps the entire region, including incidentally the UK.
These positive trends set the context for what, over the next three or four months, will be a barrage of negative stories. It is easy to pick on the things that are still going wrong and much harder to set those with the context of a Europe that is doing what it has to do. Here is an example. Last week, figures came out showing that during the second quarter the Irish economy had dipped back into negative territory. That is upsetting because it had, in the first quarter, seemed to have escaped the relentless contraction and started to grow again.
But the figures, though they depressed the markets, are not quite as dreadful as their seemed. Ireland's industrial production is now back to its pre-crisis peak, a tribute to the extent to which it has cut its costs. In addition, domestic consumption, on a three-monthly basis, has started to rise again. The second chart shows what is happening on a year-on-year basis and the numbers are still negative as you can see. But even on a yearly basis the collapse in consumption has clearly bottomed out. The graph is trending up. Phew.
There is a bigger point here. This is the first crisis for the Eurozone, the first serious economic downturn in its history. There are grave structural weaknesses in the whole conception, the most serious being that it is impossible to set a single interest rate that is appropriate for so many different economies. The right interest rate for Germany is bound to be the wrong interest rate for Spain. (Actually both had the wrong rate – it was for most of the past decade too high for Germany and too low for Spain.) But the political will to hold the Eurozone together is enormous. Politics can, for a while, hold off economics.
There will in another decade, maybe a little sooner, be another global downturn. My own expectation is that this will force some countries to leave the Eurozone. But, meanwhile, don't underestimate the work the fringe countries, including Ireland, are doing to correct their mistakes. And don't underestimate the work Germany has done to remain a soundly-managed economy.Reuse content