Eurozone surprise economic star on higher growth

THE SURPRISE economic star of 2017, when it wraps up next month, will have been the euro zone: growth looks set to come in at 2.2 percent compared with a forecast this time last year of just 1.4 percent.

Combine this with four years of falling unemployment and inflation well out of the deflation-worry zone, and policymakers and politicians have something to crow about.

But is something substantial going on, or is this another false dawn for an economy that has managed less than 1.6 percent average annual growth in its 18-year history?

A sceptic might say it is all just cyclical, soon to reverse. Or that it is simply the result of 2.2 trillion euros in European Central Bank stimulus forcing a famously sclerotic economy to budge.

Both have certainly played a role – but although there are risks that does not mean the growth impetus is not different from previous upswings or that it will end quickly.

The cyclical argument, for example, stems from the eurozone’s proclivity to lag the US economy, tending to start a take-off just as the latter is stalling.

Indeed, the current euro zone cycle is four years behind the US one.

With some signs the long US economic recovery might be peaking, the sceptic could claim that in typical fashion the euro zone has started just as the Top Gun has finished.

But there are differences from, say, 2006 when after four years of lagging growth the euro zone surpassed the US only to tumble as the financial crisis hurt both countries.

One, says Paola Subacchi, a senior fellow at Chatham House, is Europe’s acceptance that growth sometimes needs help.

“There is now an understanding – even in (fiscally hardline) Germany – that demand needs to be supported,” she said.

“Unlike 10 years ago, or even five years ago, there is an understanding that you can’t just sit and wait for growth.”

It is not that austerity measures introduced after the financial collapse have been dumped wholesale, rather that some governments are more willing to add spending to the mix – especially after many voters deserted mainstream parties.

Germany, for example, has increased public spending on roads and bridges, faster internet and social housing – turning state spending into one of the most important growth drivers in the eurozone’s economic powerhouse over the past two years.

Some structural reforms have been undertaken after years of being called for in vain by central bankers, the International Monetary Fund and others.

More flexible labour laws – notably in Spain and Ireland – have helped prompt growth, notes Florian Hense, of Berenberg bank. Although well off its mid-2013 high of 12.1 percent, the eurozone’s unemployment rate is still 8.9 percent – enough, Hense reckons, for two more years before there is any labour shortage.

Attempts are also being made to keep such reform coming. In France, President Emmanuel Macron has already signed decrees to cap payouts on unfair dismissals, while also giving companies greater freedom to hire and fire.

The balance for eurozone reformers will be how to achieve their plans against a wave of anti-establishment sentiment among voters angry at being left out of the post-financial crisis recovery.

The eurozone’s new growth climate has also been fostered by the ECB’s stimulus, but its withdrawal may not be as damaging as it was in 20112012.

Governments are more willing to boost spending, along with undertaking structural reforms.