Growth is slowly re­turn­ing but past cri­sis has left deep scars

Eco­nomic re­forms are at last tak­ing ef­fect as EU presses ahead with in­ter­na­tional trade deals, writes Jennifer Rankin

The Observer - - BUSINESS -

t was a story few pre­dicted: the eu­ro­zone is grow­ing faster than the United States. When Jean- Claude Juncker gave his an­nual state-of-the-union speech on Wed­nes­day last week, Europe’s boom­ing econ­omy was near the top of his list. Ten years since the cri­sis struck, “Europe’s econ­omy is fi­nally bounc­ing back”, the Euro­pean com­mis­sion pres­i­dent told MEPs. De­tail­ing the eco­nomic resur­gence, but also re­fer­ring to the EU’s new­found unity af­ter Bri­tain’s vote to leave, Juncker de­clared: “The wind is back in Europe’s sails.”

In fact, growth in the 19-coun­try eu­ro­zone has qui­etly out­shone the US for the past two years. The lat­est an­nu­alised growth num­bers show the sin­gle currency bloc grow­ing at 2.3%, com­pared with 2.2% for the world’s largest econ­omy. Eu­ro­zone un­em­ploy­ment has fallen to the low­est level since 2009, while fac­to­ries are hum­ming, with pro­duc­tion up 3.2% on last year.

The up­turn in for­tunes is likely to con­tinue, says James Nixon, chief Euro­pean econ­o­mist at con­sul­tancy Ox­ford Eco­nom­ics. “The euro area has done a lot of work over the last decade to get its house in or­der and also a lot of struc­tural re­form. That has been an ex­tra­or­di­nary, ex­cru­ci­at­ingly slow process but it is start­ing to bear fruit.”

The eu­ro­zone might be do­ing bet­ter, but the cri­sis has left deep scars. In France, the econ­omy is ex­pand­ing at an an­nu­alised rate of 1.7%, fu­elled by con­fi­dence in Pres­i­dent Em­manuel Macron and his re­form agenda, but growth con­tin­ues to lag the eu­ro­zone av­er­age. Ger­many’s econ­omy re­mains solid, but Ger­mans are in­creas­ingly wor­ried about in­equal­ity and low-wage jobs. Spain has bounced back from the cri­sis, but in­equal­ity is ris­ing and un­em­ploy­ment re­mains painfully high at 17% – se­cond only to Greece. Italy’s econ­omy is do­ing bet­ter, but wor­ries re­main over its heav­ily in­debted banks.

De­spite the rapid pace of job cre­ation, eu­ro­zone un­em­ploy­ment re­mains high (9.1%), worse than the EU av­er­age (7.7%) and the US (4.3%). Economies would need to ex­pand faster to gen­er­ate steeper falls in un­em­ploy­ment, says Cinzia Al­cidi, head of eco­nomic pol­icy at the Cen­tre for Euro­pean Pol­icy Stud­ies (CEPS). “The out­look has im­proved a lot but we are still closer to 2% than 3% [eco­nomic growth], so the ef­fect [on un­em­ploy­ment] will be milder and take more time.”

This ex­plains why eu­ro­zone-watch­ers are fo­cused on eco­nomic re­forms. Above all, they are look­ing at whether Macron can suc­ceed in push­ing through far-reach­ing labour re­forms to make it eas­ier for small and medium-sized firms to fire work­ers. French min­is­ters be­lieve such re­forms will ac­tu­ally make it eas­ier for the young and low-qual­i­fied to break into the labour mar­ket. If France suc­ceeds, pres­sure is likely to build on Italy to un­der­take sim­i­lar mea­sures.

“It is pos­si­ble that, in this frame­work, this could be the start of a decade-long pe­riod of ex­pan­sion – golden years for the euro area,” ar­gues Nixon.

Euro­pean lead­ers also want to push on with eu­ro­zone re­forms. Two days af­ter the Ger­man elec­tions on 24 Septem­ber, Macron is ex­pected to set out a de­tailed blue­print of his ideas, which in­clude a eu­ro­zone fi­nance min­is­ter and par­lia­ment. “Ei­ther the eu­ro­zone moves from be­ing an im­per­fect mon­e­tary union to a true eco­nomic con­ti­nent, or it could dis­ap­pear,” fi­nance min­is­ter Bruno Le Maire told the Fi­nan­cial Times last week.

Be­yond shoring up the eu­ro­zone, the EU is press­ing ahead on trade: the elec­tion of Don­ald Trump on an “Amer­ica First” ticket helped bring the long-dis­cussed EU-Ja­pan trade deal closer. This week Juncker said the com­mis­sion wanted to start trade talks with Aus­tralia and New Zealand – per­haps one in the eye for Brexit dreams of “Canzuk”, a trad­ing al­liance of English­s­peak­ing Com­mon­wealth coun­tries.

“The UK po­si­tion is look­ing very, very lonely,” Nixon says. “The UK ar­gu­ment, to a cer­tain ex­tent, has al­ways been that we didn’t want to be part of what looked like a fail­ing club, and I al­ways felt that was a very An­glo- Saxon, jaun­diced way of look­ing at things.”

‘In this frame­work, this could be the start of a decade-long pe­riod of ex­pan­sion – golden years for the euro area’ James Nixon, Ox­ford Eco­nom­ics

French fi­nance min­is­ter Bruno Le Maire wants closer ties be­tween EU states.

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