Triple shocks threaten sickly recovery of Europe’s economy

EUROPE has not recovered. It has begun to stabilise, but only just, amid mass unemployment and with debt trajectories still spiralling out of control in Italy, Portugal, Spain and Greece.

The complacency of those dictating Euroland’s policies is breathtaking.

“Europe, it seems, has become anaesthetised to bad news,” said Simon Tilford of the Centre for European Reform.

Tentative signs of life after six quarters of contraction are deemed a vindication of shock therapy, even as the underlying crisis worsens in almost every key respect.

“The reality is that the Spanish and Italian economies will shrink by a further 2% in 2013. Greece is on course to contract by an additional 5% to 7% and Portugal by 3% to 4%.

“Far from being on the mend, the economic crisis across the south is deepening,” said Tilford.

An end to the slump — hardly assured — is not enough to reverse a compound-interest trap across Club Med as debt loads rise faster than nominal GDP or enough to render Italy and Spain viable in the Economic and Monetary Union (EMU).

Tilford said the elephant in the room was the rise in the debts of Portugal and Spain by 15 percentage points of GDP over the past year, by 18 percentage points in Ireland and by 24 percentage points in Greece. Italy’s ratio rose seven percentage points to 130% of GDP, already at or near the point of no return.

This is the fruit of “naked” austerity, conducted without offsetting monetary stimulus.

The debt spiral cannot be checked until Euroland embarks on full-blown reflation, yet EMU creditors shun such a course.

The Club Med states, in turn, have yet to throw up a leader of stature willing to forge a debtors’ cartel and bargain from strength.

Much was made of a slight fall in Spain’s registered unemployed in August. The more relevant detail is that a net 99 000 people left the workforce in a single month. Some are going to Britain. We now know that 45 530 Spaniards signed up for UK National Insurance last year.

The EMU refugees are Britain’s gain and Spain’s loss. They no longer pay Spanish taxes or contribute to Spain’s social security system, sliding towards bankruptcy as the reserve fund is depleted.

Not that the exodus from southern Europe has made a dent in youth unemployment rates: 62.9% in Greece, 56.1% in Spain, 39.5% in Italy, 37.9% in Cyprus and 37.4% in Portugal.

Euroland has been hit by three shocks, serious when combined, which are likely to bite with a delay. The euro has risen 30% against the Japanese yen over the past year, 25% against the Indian rupee and 20% against the Brazilian real. It is has even risen against the US dollar.

To make matters worse, borrowing costs have jumped by 70 basis points across Europe since the US Fed began to talk tough in May.

Europe will now have a third shock to contend with, and perhaps a fourth if the emerging-market rout continues.

Brent crude has jumped $15 a barrel since June, nearing the economic inflexion point of about $120 even before missiles rain on Damascus. This will tighten the deflationary vice further by draining spending power from the economy.

Yet the mystics at the Bundesbank still seem to think that oil spikes are inflationary. They have largely succeeded in imposing their 1970s views on the European Central Bank’s governing council.

They raised rates to counter the pre-Lehman oil shock in July 2008 even though half of Europe was already in recession, the worst monetary policy blunder since World War II. They repeated the mistake in 2011, causing Europe’s double-dip.

Even if eurozone growth does gather speed, it will bring forward the day when Germany demands rate rises to head off overheating in its own misaligned economy. This will change the contours of the crisis, not solve it. The 20% gap in labour competitiveness between north and south — the fundamental cancer of the EMU project — will remain. — © The Daily Telegraph, London