Hamish McRae: Diverging eurozone nations still set for horns of a dilemma

Economic Life: Choice could be between massive intervention leading to the euro's demise or a stricter stance causing financial crisis

Yes, but what about the real economy? Europe's banks duly took their wodge of money at 1 per cent from the European Central Bank, the surprise being not the total amount dealt out, up a little on the previous tranche at €529.5bn, but the numbers of institutions applying. More than 800 banks (and companies, since some also have banking licences) sought loans, against 532 banks last time. Either a lot of banks are in more trouble than we realised or a lot more have cottoned on to the idea that you borrow money at 1 per cent from the ECB and put it into your government's three-year government debt yielding 5 per cent and that is not a bad risk-free investment. Risk-free? If it is your own government and it defaults you are in the soup anyway.

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So now the eurozone economy has since December had an extra €1,000bn of liquidity pumped into it. The banks are secure for a few months and the sovereign debt crisis will recede for a few weeks. But the response on the markets was notably muted. The main indices in Germany and France were virtually unchanged; bank shares were up a bit but nothing special; and bond markets moved very little too.

So there will be a period, maybe only a short one, of relative calm. The focus will shift to what is happening to the European economy, which immediately opens up the issue that there are three different eurozone economies, for we are in a three-speed Europe.

That is caught in the top graph, which comes from the new European Economic Advisory Group forecast. The story it tells is not encouraging. As you can see, the German economic bloc, the red line, has sustained a solid recovery over the past two years, whereas the three economies that had to be bailed out, Greece, Portugal and Ireland, are still losing ground. The blue line is still in negative territory. There is a middle bloc, France, Italy, Spain and Belgium, shown in the green line, that is still above water, or at least was in the middle of last year.

The thing I find most interesting about this graph is the way the lines have reversed since the early 2000s, when core Europe was struggling and fringe Europe racing ahead. We know now that for core this was the result of having too tight a monetary policy while for the fringe this was the result of the artificial boost from too low interest rates. In short, you see in that graph the way in which the one-size-fits-all interest rate of the eurozone encouraged economic divergence.

That is the past; what about the future? The bottom graph shows the forecast for the EU as a whole for the coming year. It is a bit more upbeat than most current forecasts, as it shows this quarter flat, a bit of growth in the second quarter and a slow recovery thereafter. But including the non-eurozone countries will have boosted the performance a little. As far as the eurozone is concerned many independent forecasts think it will have at least one more quarter of negative growth before recovery.

It is becoming very misleading to think of Europe as being a single economy when divergence within Europe and even within the eurozone has become so marked. The report notes how within the eurozone there is an increasing balance of payments problem. There are two broad reasons for this. First, there are large current account imbalances, with Germany and the Netherlands running a current account surplus of 6 per cent of GDP between 2005 and 2010, and Portugal and Greece running a deficit of more than 10 per cent of GDP.

Second, there is capital flight. Depositors in banks in the fringe countries are taking their money out and sticking it in banks in core ones. Over the past six months deposits in banks in Greece have fallen by 13 per cent, in Portugal and Ireland by 9 per cent and Italy by 8 per cent.

The EEAG report acknowledges that, while the development of the euro crisis is impossible to forecast, the future choice could be between massive intervention to prevent an immediate crisis but leading to the euro's demise in the long run; or by a stricter stance that might save the euro but lead to an acute financial crisis. I suppose, as someone who has long argued the eurozone will eventually break up, I am allowed to observe that they might manage to achieve both: ensure the euro's demise but also inflict huge economic distress on the way. But that endgame is still some way off.

A footnote: have another look at the bottom graph. It shows how EU growth resumed in the third quarter of 2009. Now in that same quarter the UK economy was reported to have shrunk by 0.4 per cent, leading to criticism of the Labour government that British policy was not working. We were still in recession when Europe was pulling out. But that figure was wrong. Now more than two years later we know that what actually happened was growth of 0.2 per cent. The UK did indeed emerge from recession along with the US and Europe.

So I thought I had better look back and see what I wrote: "In the yah boo of British politics that is embarrassing for the government. Plans for the Prime Minister to proclaim proudly the week before that he had led the country out of recession had to be quietly shelved. But in the broad scheme of things it matters little, particularly since it may well turn out that our economy has indeed pulled out of recession and the figures are wrong ... some sort of turning point has been reached."

Now apply the same approach to the estimate for the final quarter of last year, which was for minus 0.2 per cent growth. Simon Ward of Henderson notes that the make-up of the numbers is similar and we may well find that the economy continued to grow. We will have to wait and see but meanwhile please do what my statistics teacher in Dublin all those years ago urged me to do, which is take all economic data with a pinch of salt.

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