The eurozone engine-room economies of France and Germany have expanded for the first time this year, much to the surprise of economic analysts who were expecting another contraction in the second quarter of 2009. The big question is whether this is indeed the end of the recession in Europe.
The French and German economies bounced back to growth mainly as a result of buoyant consumer and public spending, as well as better balance of trade results. The car scrapping schemes introduced to give a lifeline to the struggling automobile industries in both of these countries is a major contributor to this surge in private spending.
But not all news from the eurozone's second quarter GDP statistics are equally encouraging. Spain, that like Ireland is still struggling in a deep recession, showed a contraction of one per cent. The Austrian and Belgian economies shrank by 0.4 per cent, while Italy had a negative growth of 0.5 per cent. Overall GDP in the eurozone fell by 0.1 per cent.
It is easy to get euphoric when examining these surprising figurers. The reality, however, is that while economic recovery could well come earlier than expected up to some months ago, the bounce back to sustained economic growth will take much longer.
The collateral damage caused by the deepest recession in the last 80 years still needs to be addressed. Unemployment is likely to remain high in most eurozone countries posing a formidable social and economic challenge to most governments some of whom, like Germany, will be facing electoral tests soon.
More worryingly, outside the eurozone area other EU economies are facing unprecedented pressures to keep their economies on an even keel. The Baltic States saw double figures drop in economic activity while Hungary's economy also shrank by 7.6 per cent.
All these developments indicate that the EU Commission will be facing a tough agenda in the coming months to ensure political, economic and social stability within the Union. It is not inconceivable that some EU economy may need an IMF style rescue package to ensure basic economic stability and avoid the kind of meltdown that Iceland faced some months ago.
On the local front the growth registered in France and Germany is indeed good news. Demand for our goods and services from these countries, and hopefully from other countries like Britain and Italy, should soon begin to increase again. While tourism and export figures for the last few months still need to be updated, they are likely to show that our economy is stagnant, if not still shrinking.
The local economic situation is rendered more delicate because a number of national macroeconomic issues still need to be addressed. As the IMF's recent report on Malta indicates, these include the reforms in our public finances, the revamping of our social services system to make it financially sustainable in the long-term, and the upgrading of education to improve Malta's competitiveness.
Unfortunately, so far the pre-budget document has not kick-started a serious debate amongst the social partners and political parties on how these important issues are to be addressed equitably and effectively. The debate needs to go beyond the narrow issue of the effects of COLA on the cost of labour.
The good news coming from the major economies we do business with can only be optimised if we start sharpening our competitive edge by eliminating long outstanding inefficiencies that are burdening our economy. Now is the time to act on these issues.