Bill Jamieson: No early end to euro misery

The performance of the Eurozone and Chinese economies will have critical impact on our own performance. Picture: Getty
The performance of the Eurozone and Chinese economies will have critical impact on our own performance. Picture: Getty
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WHILE we bicker about the Westminster coalition’s economic policies, it is the world outside that has a critical influence on our fortunes – the pace of growth in China, the resilience of developing country economies and in particular the performance of the Eurozone.

For the past three years Chancellor George Osborne has routinely cited the Eurozone crisis and the comatose economic performance of the Euro-bloc as a heavy anchor slowing our own domestic recovery. But with high unemployment in the Eurozone showing its first fall since 2010 and Ireland emerging from intensive care, might the tide at last be turning in Europe, with benefits to UK trade and exports?

The good news is that the global economy overall is set for further acceleration in 2014. Citigroup forecasters expect the growth pace to quicken, from 2.4 per cent this year to about 3.1 per cent next, the best performance since 2010.

Of course, much of this is due to the notably faster pace of expansion in developing economies. But growth in the mature advanced economies is expected to improve from 1.1 per cent this year to about 2 per cent in 2014. The UK and US look set to enjoy growth of about 3 per cent. But Japan, the bright hope of the past 18 months with the experiment in expansionist “Abeconomics”, is set for a slowdown as the rise in consumption tax hits home.

Monetary policy is likely to remain loose across advanced economies. But the US Federal Reserve is likely to end asset purchases in late 2014. A range of advanced economies (probably including the UK) will begin to withdraw stimulus in 2015, but are unlikely to tighten enough to trigger significant slowdowns.

And many emerging market economies are expected to tighten monetary policy in 2014, Citigroup reckons, “even amidst disappointing growth, reflecting a mix of worries over inflation, current account/fiscal imbalances and rapid private credit growth”.

As for the Eurozone, economic growth in the third quarter was just 0.1 per cent quarter-on-quarter, down from a 0.3 per cent growth rate in the preceding three months. Moreover, this fractional growth owed much to a contribution of 0.3 percentage points from inventories. Exports could only manage an improvement of 0.2 per cent. A slippage in retail sales in October hardly suggests that a strong upturn is just around the corner.

As Global Insight economist Howard Archer points out, it was particularly disappointing to see France suffer a renewed GDP dip of 0.1 per cent quarter-on-quarter, sparking concerns about its underlying competitiveness. Meanwhile, the German growth rate more than halved in the third quarter compared with the opening three months of the year. Spain managed a growth rate of just 0.1 per cent. Italy marked time.

For the year overall, the Euro-bloc is likely to have suffered a contraction of 0.4 per cent. Next year, the Eurozone is unlikely to do much better than 0.8 per cent.

After months of relative calm in financial markets, and with Ireland now free of its reliance on International Monetary Fund (IMF) emergency assistance, it is tempting to believe European politicians when they declare the worst to be over for the 17-member single currency zone.

The persistent worry is how long the Eurozone can expect to enjoy social and political stability while its grotesquely high unemployment rate continues to feed widespread public frustration and dissatisfaction. Its crisis is far from over. And the longer its high rate of unemployment persists, the more doubtful the assertion becomes that the worst really is behind it.

Last week Christine Lagarde, the managing director of the IMF, warned against prematurely declaring an end to the economic crisis. “Can a crisis really be over when 12 per cent of the labour force is without a job? When unemployment among the youth is in very high double digits, reaching more than 50 per cent in Greece and Spain? And when there is no sign that it is becoming easier for people to pay down debts?”

High youth unemployment, she added, could jeopardise the economy’s ability to grow, by creating a generation of young people without the skills to take their place in the jobs market. She has called for a package of reforms, including fixing the banking sector to “jump-start growth”, and warned that governments might yet need to resort to a new fiscal stimulus if recovery fails to take hold.

But we have heard calls for reform “packages” many times before. Fixing the banking system is a slow and complex process, difficult to undertake without reducing the ability of Eurozone banks to undertake the expansion of business lending that Brussels wants to see.

And what more can the European Central Bank do, given that it has recently cut interest rates to stave off deflation? This leaves the tricky business of labour market reform – making it easier for skilled employees to cross Europe’s borders in search of work, cutting employment regulation and shifting the burden of taxation from income to consumption – in the hope of boosting employment.

But all these present political difficulties, with Eurozone governments and labour organisations strongly opposed to measures that are seen to undermine job security. Because of that, Europe remains in an economic and political box and unable to escape without an unacceptable loss of national discretion on fiscal policy and troubling and disruptive social consequences. And that could continue to cast a shadow on our own efforts to achieve a rebalancing from consumption to exports.

Twitter: @Bill_Jamieson