Salute the mini-boom – just don’t mistake it for a durable recovery
What’s the most surprising economic statistic to come out of Europe this year? You could make a case for the dramatic rebound in car sales, which hit a fiveyear high in June. Or the fact that German retail sales, virtually flat since the country joined the euro more than a decade ago, recorded their strongest first-half increase in nearly two decades in the first six months of this year. But my personal favourite is this: Spanish cement consumption is surging again, up 13pc year on year.
A country that at the height of the last eurozone bubble was consuming half the cement in Europe is now witnessing a fresh construction boom, even though it is already covered in property that is virtually worthless. That is just one sign of a boom in a range of assets across Europe.
Ireland is surging once again, with house prices in Dublin soaring. Portuguese equities are on a roll.
Some people will tell you that is a sign that the eurozone is recovering, especially along its troubled periphery. The crisis has been fixed. Perhaps it has. But, in reality, it looks more like a new run-up in asset prices, driven by cheap central bank money. To paraphrase The Who: meet the new bubble, same as the old bubble. And a few people, it seems, are getting fooled all over again.
Despite all the troubles in Greece, and the dire performance of major countries such as Italy and France, there have been some signs of a recovery in the eurozone in the past few months.
Spain is the most dramatic example. A country that at the height of the single currency’s crisis back in 2011 was only a whisker away from needing a full-scale bail-out, is now, remarkably, the fastest growing of the big European economies. Spain is expanding at an annualised rate of 3.1pc, returning to the levels last seen before the crash. It has not done much to reduce crucifying levels of unemployment yet, but it is a big improvement on a couple of years ago.
Ireland, which had to be bailed out at huge cost, is also looking in much better shape. Its economy expanded by slightly over 5pc in the past year. At the end of July, its total GDP clawed its way back to pre-crisis levels, finally making up for all the ground lost when it’s banking system fell apart. Indeed, even Portugal, the other country to be bailed out, has made some progress. It managed to eke out growth of close on 1pc in 2014, which was better than the recession it suffered in 2013. Overall, of the PIGS, to resurrect an unflattering acronym that was popular when the periphery was close to collapse, only the G – for Greece – is still in deep trouble.
Start adding all that together, subtracting the basket-case Greeks, and you can assemble an argument that austerity across the eurozone has been working, the peripheral countries are recovering, and, so long as everyone simply presses on with reform, the European economy is on its way to being fixed. The trouble is, when you dig into the figures, the picture is far less reassuring.
Start with Spain. Its growth numbers look impressive. But it is mainly driven by consumer spending, and remarkably enough by a construction boom. You might think there is nothing left to build in Spain – only last month, an airport outside Madrid that cost a billion euros to build was sold off for the princely sum of £7,000, or less than the cost of Skoda’s cheapest car, the Citigo (and that’s the basic model). Still, in the past few months, the cranes have swung back into action. Apartments and airports will soon be springing up everywhere.
Or take Irish house prices. They are up by healthy 13pc year on year. Dublin prices are up 15pc year on year. They are still some way short of their peak, but they are recovering fast. Or take Portuguese equities. Despite the fact that there is almost nothing to like about the Portuguese economy – it has slow growth, massive debts, and very little in the way of exports – its stock market has been on a tear. Over the first few months of this year, the PSI 20 jumped from 4,600 to 6,200, before correcting a little with this month’s global sell-off in the markets.
You can argue that is sustainable. But in fact, what is happening looks a lot like a bubble driven by quantitative easing. Earlier this year, the European Central Bank President Mario Draghi finally pressed the button on his own version of QE. It started out with €60bn a month of printed money, and by May he was up to €100bn – in other words, a serious amount of extra cash is being pumped into the system, month after month. It wasn’t hard to work out why. At the turn of the year, the eurozone was slumping into deflation, and a recession was turning into a depression. Full-scale quantitative easing was the only weapon left to combat that.
No one really knows whether QE does anything to boost the real economy. Economists will probably be studying that question for years without ever reaching any definitive conclusions. But what we do know for sure is that it stokes up asset bubbles. That happened when Japan became the first country to experiment with QE in the Nineties, and when the Federal Reserve and the Bank of England started printing money in the wake of the 2008 crash. Newly minted cash poured into stock markets and property – indeed one of the ways that QE may work is by lifting asset prices, and so creating at least the feeling of wealth.
Why expect the eurozone to be any different? Once the ECB turns on the presses, you’d expect asset bubbles to start popping up all over the continent. And sure enough, that is precisely what appears to be happening.
The problem for the eurozone is the same as it was in the run-up to the last crisis. ECB policy is always too expansionary or too tight for one country or another. And when the central bank prints money, or boosts demand by slashing interest rates as it did a decade ago, it can’t control where it ends up. In the mid-2000s, too much money poured into Spanish construction and Irish property. And now the same thing is happening all over again. The eurozone is blowing up exactly the same bubbles as it blew up between 2000 and 2007. How will that end? Just the same as it did last time – with a massive crash and then a fresh crisis. There will be a brief boom, but it is fuelled by printed money – and it would be a mistake to confuse it for a durable recovery.
‘An airport outside Madrid that cost a billion euros to build was sold off for the princely sum of £7,000’