euro zone economy real recovery or another sirens’ song
Last Updated : GMT 06:49:16
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Last Updated : GMT 06:49:16
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Euro zone economy: Real recovery or another Sirens’ song?

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Arab Today, arab today Euro zone economy: Real recovery or another Sirens’ song?

A man walks past 'Euro 2012'
London - Arab Today

 Over the years, euro zone economic growth has been a bit like the Sirens in Homer’s Odyssey: Singing a song of promise, only to end up pulling you onto the rocks. Will it be different this time?
The strong growth registered in numerous data releases and surveys at the beginning of this year has surprised many.
One eye-opening example was the release of flash purchasing managers indices for France, Germany and the euro zone on Feb 21. Of nine indexes, eight registered growth and six did so at a higher level than any economist polled by Reuters had imagined.
Not surprisingly, economists and policymakers are now looking for firm proof that the euro zone’s apparent rebound this year is sustainable, as well as noting a variety of potentially destructive economic and political hazards ahead.
There has not been, they say, a specific inflexion point at which it can be said that the euro zone has recovered and is off on a growth tear. Rather it has been a slow simmer.
“The euro zone has been recovering steadily for three years now, helped by monetary policy stimulus, an end to fiscal austerity and a healthier financial sector,” said James McCann, OECD economist at Standard Life Investments.
“(It is) a steady recovery, which has been trundling on.”
The numbers confirm this. The European Commission (EC) notes that real gross domestic product (GDP) in the euro zone has grown for 15 consecutive quarters — a sign of steady improvement.
But putting aside some of the latest data, it has been steady rather than spectacular. Economic growth is still running at only around 1.6 percent annually, and most forecasters — from economists polled by Reuters to the EC itself, reckon it will be about the same this year.
So the question is whether the recent data has turned this on its head. Even before considering whether Greece’s debt problems will come back to bite the euro zone, there are two main strands: Inflation and elections.
While the repetition of positive January and February data in the month ahead — for example, German industrial orders soaring again — would fuel the euro zone takeoff story, inflation may hold the key.
“The risk of disappointment is that higher headline inflation decelerates real income growth and consumption,” said Paul Mortimer-Lee, global head of market economics at BNP Paribas.
The preliminary reading of February euro zone inflation, to be reported on Wednesday, is expected to come in at 2 percent year-on-year, rising to the European Central Bank’s (ECB) target on the back of monetary stimulus and economic growth.
While far from hyper, such a level has not been seen for four years, and there has been a strong inverse path taken between inflation and retail sales over the last five years.
In other words, rising prices can hurt consumer spending, which in turn drives economies.
Unemployment during the financial crisis accounts for some of the dive in retail sales seen on and off since 2008. But joblessness, though improved, is still twice that of, say, the US.
So if euro zone inflation were to overshoot in the coming year, it may well stifle the very growth that engendered it. Economists, however, also see a growth killer in the bloc’s politics.
Many have long argued that the euro zone cannot compete as a leading economy without substantial structural reform — particularly in the number two and three economies after Germany.
“It comes down to France and Italy stepping up a gear,” said Florian Hense, European economist at Berenberg private bank.
But it is exactly in those two countries where politics is threatening to delay or derail the type of pro-growth structural reforms advocated by the ECB and many private sector economists.

Source: Arab News

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euro zone economy real recovery or another sirens’ song euro zone economy real recovery or another sirens’ song

 



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