3 Major Risks to Europe’s Economic Recovery

European Union Flag

Source: http://www.flickr.com/photos/87913776@N00/

“This summer in Europe we have seen a succession of welcome signs that the European economy has reached a turning point,” Olli Rehn, European Commissioner for Economic and Monetary Affairs and the Euro, told reporters outside the Austrian village of Alpbach on Thursday, where an annual economic summit is taking place. ”In particular, GDP data for the second quarter of this year have confirmed the beginnings of a gradual although still subdued recovery.”

Indeed, gross domestic product increased 0.3 percent in both the euro area (EA17) and the European Union (EU27) in the second quarter, according to a flash estimate from Eurostat. The growth broke six consecutive quarters of economic contraction in the region, a deep recession that was characterized by severe austerity in Greece and Spain, financial failure in Cyprus, and only tepid growth in the region’s strongest economies. The downturn was only arrested by sometimes dubious monetary and fiscal policies such as levies on bank deposits (to avert financial collapse in Cyprus) and severe austerity (to curb debt in Greece and Spain), and the real cost of the recession is still being counted.

Writing in a his blog, Rehn captured the situation: “Yes, this slightly more positive data is welcome — but there is no room for any complacency whatsoever. I hope there will be no premature, self-congratulatory statements suggesting ‘the crisis is over’. For we all know that there are still substantial obstacles to overcome.” Rehn goes on to name the obstacles.

1. “The growth figures remain low and the tentative signs of growth are still fragile.”

Like much of the rest of the world, the Europe was launched into recession in the wake of the 2008 financial crisis. Quarter-over-quarter GDP growth, previously plugging along at a relatively healthy rate between 0.5 and 1 percent, crashed, and contracted severely for several quarters before returning to growth late in 2009. However, the period that followed was characterized by somewhat misleading growth.

Comparisons were artificially favorable because of the tremendously low growth in the previous periods. Real economic conditions continued to deteriorate despite headline GDP growth, particularly in austerity-stricken regions like Spain, Greece, and Italy. The machinery of economic activity has, arguably, growled to life in major economies like Germany, but the nation’s back is strained by a million financial burdens.

Wealthier EU nations have become creditors to the financially distressed, and the questionable mix of bailouts and austerity has largely failed to invigorate economic activity in those hard-hit regions. The current environment seems to be one where much of the hard-fought growth generated by strong economies is simply absorbed and nullified by weak economies. The European Central Bank is currently forecasting a full-year economic contraction of 0.6 percent for 2013, and growth of 0.9 percent in 2014.

Euro GDP

Source: Eurostat

2. “The averages hide important differences between Member States, as a number of Member States including Spain and Greece still have unacceptably high unemployment rates, especially for young people, which has created real risks of a lost generation.”

Unemployment across the European Union is incredibly high. The average seasonally-adjusted unemployment rate in the EA17 was 12.1 percent in June, plat with May but 0.7 percentage points higher than where it was a year ago. In the EU27, headline unemployment clocked in at 10.9 percent, down slightly from 11 percent in May but up 0.4 percentage points from a year ago. There are an estimated 26.4 million unemployed in the EU.

Germany, the perennial engine of growth in the region, logged one of the lowest rates at just 5.4 percent, but one working economic mechanism out of many broken ones hardly makes a working machine. Unemployment in Greece was 26.9 percent at the last reading in April, and 26.3 percent in Spain.

Rehn pointed at the unemployment among youth (those under 25). The unemployment rate in this demographic was 23.2 percent in the EU27 and 23.9 percent in the EA17.

June Euro Unemployment

Source: Eurostat

3. “The implementation of essential but difficult reforms across the EU, in countries both under programmes and other Member States, is still in its early stages.”

Financial reform in the EU has been, to put it one way, a tragic mess so far. At best, progress has been slow — at worst, things have moved backwards. Observers have pointed at the actions of the Troika — the International Monetary Fund, the ECB, and the European Commission — engaged in a strategy to bailout and reform Greece that was ultimately a massive failure. The country has been in recession for six years, and it’s unclear that it will return to growth in the next two.

Bailout funds have ensured interest payments to certain financial institutions at the cost of ensuring funding for public services, leading many to believe that it was the people, and not the banks, that ultimately received punishment for crisis. But political conditions are tough. German Chancellor Angela Merkel has onlookers a bit nervous despite her strength in the polls at a time when Germany is picking up some good news. Should her coalition shift away from the free market-oriented Free Democratic party, her governance could become weaker or at least more complicated as Germany tries to maintain its current economic direction.

Making tough economic decisions is necessarily more tough when you are up for re-election. Then there is France, where President Francois Hollande is wildly unpopular, making his political life very precarious. Hollande has gone so far as to avoid vacationing at a particular island because its perceived lavishness could be adding to his dismal ratings. Eighty-four percent of the French public feels that Hollande will be unable to reduce unemployment by year’s end, according to French 24. Job hunters older than 50 in the economically stagnant country account for 30 percent of the unemployed.

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