European politics may be all over the place, and will generate riveting stories throughout the summer. But European economics has received a lot less attention. If it had, we might have started to appreciate that a general recovery, albeit a sluggish and uneven one, has started to take hold.
If you take as a starting point growth last year, the Eurozone reached 1.7 per cent. That was slightly slower than the 1.8 per cent of the UK, but faster than the 1.6 per cent of the US. All these numbers will be revised, probably several times, for that is the way of the world. But the basic proposition that Europe is growing at pretty much the same rate as the US and UK surely stands.
This year, who knows? But, for what it is worth, the European Commission now forecasts 1.7 per cent growth, slightly faster than it expects for the UK. As for the US, the general consensus is for it to grow at around 2.5 per cent – so a little faster, but, given the uncertainties, not massively so.
Where this “Europe doing OK” story breaks down is that the overall picture conceals some very good performances and some deeply troubling stuff. In shorthand, the north is doing well and the south not so.
Germany continues to create jobs, not just for itself but for the rest of Europe. Scandinavia is fine. The Netherlands and Ireland are fine. Most recently the French economy has picked up a little, with unemployment now securely below 10 per cent, and reforms promised by the front-runner for president, Emmanuel Macron. He said this week that he plans to cut government spending and bring in labour market reforms.
Most interesting is the divergence between Spain and Italy. Spain looks set to be the fastest growing of the larger eurozone economies this year, with growth around 2.5 per cent, whereas Italy is projected to be the slowest, with growth at only 0.7 per cent.
Spain has made a series of reforms to its labour market and that has boosted employment – though unemployment there remains dreadfully high at just under 19 per cent. Italy has barely grown since the euro was introduced in 1999, leading to large-scale emigration of its qualified young, and concerns that its pile of national debt can never be repaid.
The problems of Greece have been widely publicised – there are currently some debt renegotiations taking place and these may well fail – but the existential threat to the Eurozone is Italy rather than Greece. Greece is small enough for the rest of Europe to bail it out, given the will to do so. Italy is not.
There is no question that the eurozone has had a worse performance since 2008 than either the US or the UK. The point is that now it is growing quite well.
Why? Well, if there is a single answer it must be that the European Central Bank’s (ECB) ultra-easy monetary policy has worked. The long period of zero or even negative interest rates, coupled with quantitative easing, has had all sorts of odd effects, including encouraging the Swedes to pay their tax early. Sweden is not in the eurozone but its official interest rates have been negative to hold down the krona against the euro. And the Swedish state pays 0.6 per cent interest on excess balances. So rather than get zero interest from a bank, people have paid tax early and benefited from the tiny bit of interest they get from the government.
There are other distortions, and it now looks as though the ECB may eventually have to tighten policy later this year. There will be pressure from Germany to do so. German inflation was 2.2 per cent in February, the highest in four and a half years, and above the ECB mandate level of “close to but under 2 per cent”.
But there will equally be pressure from the rest of Europe to keep policy very loose. The problem, evident since the foundation of the euro, is that Germany needs higher interest rates but Italy and Spain (and certainly Greece) do not. The ECB has to set a single interest rate for a diverse economic area.
The changing nature of the EU, then – highlighted by the new Commission paper outlining five different visions for its future – remains a huge long-term issue. The weak performance of Greece and Italy also remains a huge long-term issue. But despite all that, the present economic performance of continental Europe, taken as a whole, is not too bad. And it looks to improve further in the next few months.
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