At the beginning of this month, the European Central Bank published its report on the economic performance of the eurozone member states for the first six months of this year. The report was not terribly exciting to read and it did not provide any good news.
The main message was that the eurozone economy is still very fragile and that that growth is not homogeneous across the whole area. There are definite signs of immobility in the eurozone.
Economic prospects for the future remain fairly pessimistic, with the ECB citing as reasons the conflicts in the Middle East, the Ukraine and Iraq and the slowdown of the emerging markets. The German economy has not grown for the first time since 2012, while estimates of growth for the second largest eurozone economy, France, have been halved.
We are running the risk of an immobile eurozone because today Germany can no longer dictate matters and everyone else will follow
The ECB claims that the main internal issue in the eurozone is the lack of serious commitment to structural reforms on the part of certain countries, which makes projections on the future even more pessimistic.
Moreover, internal demand in the eurozone is lower than expected, reflecting a negative business and consumer sentiment.
The solution that the ECB is proposing is to continue on the path of structural reforms in order to incentivise private investment and generate new employment opportunities. Some countries have implemented such reforms while others are still lagging behind, with no firm commitment to make any progress on this front. The ECB has noted that progress has been registered in addressing the fiscal imbalance in a number of eurozone countries and this progress should not be put at risk.
When one reads the report of the European Central Bank, one cannot but feel that it sounds like some objective scientific report, devoid of any human touch. It is a report by a group of bureaucrats sitting in an office at the top floor of the Eurotower, the headquarters of the ECB in Frankfurt, which gives the feeling that it is very much like an ivory tower.
Maybe the writers of this report are starting to feel helpless as are some of the leaders of the countries of the eurozone economy. They have seen the growth in the US, the UK and other economies after they emerged from the recession and have compared this with the performance of the eurozone economy. Is the eurozone economy incapable of moving forward? Is it becoming immobile?
Going back to Germany, its economy has shrunk by 0.2 per cent in the second quarter of this year when compared to the first quarter, in spite of the fact that for the first time the computation of the gross domestic product has included estimates of activities that had always been excluded in the past, namely the informal economy and prostitution and the marker for drugs.
What makes this data even worse than it looks is that the drop is attributable to a decrease in exports and in investment, the two main elements that drive any economy, yet another sign of immobility.
The French economy stagnated in the second quarter of this year when compared to the first quarter and estimates now show that growth for 2013 is expected to be 0.5 per cent, down from one per cent. Moreover, the French government has stated that it will not reach its fiscal deficit target for 2014 and will make up for it in the following three years. It spoke of a cut in public expenditure of around €50 billion during the period 2015-2017. Thus any public sector reform is once more being pushed into the future.
We also need to appreciate that we are running the risk of an immobile eurozone because today Germany can no longer dictate matters and everyone else will follow. France and Italy have definitely ganged up to demand more flexibility in the implementation of the Growth and Stability Pact (the agreement that is meant to rein in the fiscal deficit in eurozone countries to a sustainable level) opposing the rigid stance of Germany.
Maybe this immobility is not the result of the current impasse with France and Italy on one side and Germany on the other, and the other eurozone countries waiting to see how it will end up. It could be the result of the last six years, when the eurozone went from one emergency to another, from one sovereign debt crisis to another, seeking to save the common currency without any long-term economic strategy.
This long-term strategy must create more dynamism, more flexibility and more confidence in the future in the single economies of the eurozone.