The Tenuous Eurozone ‘Recovery’

The economic landscape of the Eurozone has been nothing short of bleak for the entirety of this decade. Even when signs of recovery glimmered on the horizon in the spring of 2013, economic committees were hesitant to deem it anything more than a “prolonged pause” in a larger recession. After all, the strongest growth in any individual quarter since 2010 had been a mere 0.3 percent, while the aggregate annual rate amounted to nothing greater than 1.2 percent. For context, the United States boasted a nearly 9 percent GDP growth rate before the 2009 economic crisis (the worst in the 21st century). Assessing European fiscal viability now in the fall of 2015, it seems as though the “recovery” is gaining some strength. Most notably, Europe has witnessed a reawakening in consumer spending catalyzed by a dramatic drop in energy prices from last year’s oil cost collapse (which was felt in the U.S. as well as in Europe). This created a virtual tax break for consumers, which in turn greatly boosted demand for the commodity. Enhanced spending contributed to substantial economic stimulation, and eventually, growth. In terms of trade activity, exporters also reaped the benefits of the depreciation of the euro, whose trade-rated value has fallen a staggering 12 percent in the past fiscal year. Although we are witnessing signs of economic recovery, we must explore the extent to which this recovery is sustainable. For one thing, industrial production continues to falter after a large collapse last March. Although oil prices have been rising slightly in recent weeks, this can be explained by the relative easing of deflationary pressure.

The quantitative easing (an economic tactic by which federal governments or other large entities “create” money to buy financial assets) program implemented by the European Central Bank (ECB) proposes to buy €60 billion of predominantly public assets each month at least until September of 2016. These purchases will continue to devalue the euro, already a bane of equity markets. The problem with these quantitative easing measures lies in the fundamental difference between European and U.S. markets. Capital (equity) markets play a much smaller role in broader financial regulatory activity in the Eurozone than they do in the U.S., suggesting that quantitative easing measures will be much less effective than across the Atlantic.

Furthermore, the looming risk of a messy Greek default still lingers on the horizon (as it seemingly always has). Although GDP showed an estimated growth of 0.8 percent this spring, this remains anomalous since Greek banks have halted lending and the federal government has stopped payments to commercial creditors. A possible account of recent signs of “growth” in Greece is a case of consumer economic hedging in the form of investments in cars and other “durable goods” as safer forms of investment. This activity occurs against the backdrop of a possible Greek exit from the Eurozone and a resultant reinstatement of the drachma (the Greek currency, whose value is speculated to plummet almost immediately upon resurfacing). Recently, policymakers have proposed a third Greek bailout since 2010 (awaiting German approval) illustrating further “Band-Aid” attempts to stave off a reversion to the era of the drachma. Second to Greece, Germany contributes substantially to Eurozone economic activity, and in fact has bolstered short-term European economic growth. Despite this positive contribution, the future of German manufacturing seems precarious as exports are likely to suffer due to the weakening Chinese economy, a prime market for German investment goods (such as luxury cars).

Internal problems are also likely to plague the Eurozone’s road to recovery, most notably the shifting geopolitical landscape of the continent. Europe has not faced a refugee movement of such a magnitude since those of displaced persons after the conclusion of the Second World War. This summer’s “migrant crisis” has forced Angela Merkel, Germany’s chancellor, to call for the development of a unified European migration policy in which migrants are adequately distributed among member states. Such large-scale reform is likely to drain both time and resources of not only political but also economic policymakers in the Eurozone at quite an inopportune time (against the backdrop of economic crisis).

Featured Image by Associated Press