19 February 2020

Financial Times: Eurozone weakness is a test for post-crisis policy

The eurozone poses a conundrum. Recent figures suggest it is teetering on the brink of recession. Challenging conditions for manufacturers — partly brought on by trade tensions — ensured stagnation in Germany, the bloc’s largest economy, in the final quarter of last year. France, the second-biggest, shrank, due to disruptive strikes over pension reforms. Italy’s economy went backwards too, setting up the possibility of its third recession in a decade. Though few expect a second quarter of contraction in these countries, the situation is fragile. These fears helped drive the single currency to its lowest level against the dollar for two and a half years on Thursday. [...]

Overall, the eurozone grew by just 0.1 per cent during the final quarter of 2019. This is better than a contraction, but only just. On Thursday, the European Commission forecast growth for the single currency area of 1.1 per cent for 2020 — the same pace as 2019. The threats facing the eurozone are no longer existential but this patch of weakness is a test of whether the bloc’s economy is now more resilient after a decade of crises.

There are further risks on the horizon. The commission’s forecasts are based on the status quo remaining unchanged for trade with the UK. This is a technical assumption rather than a prediction, but it is unlikely to be borne out. The new strain of coronavirus has led to a shutdown in Chinese provinces that provide components for European factories and has deprived exporters of their consumers. The damage is unclear for the moment but Germany appears most exposed to any slowdown in China.

Monetary policy, however, is in much better shape today than it was 10 years ago. The ECB’s decision to cut rates at its September meeting, and signal that it was willing to ease even further if the economy deteriorates, contrasted sharply with the then ECB president Jean-Claude Trichet’s decision to raise rates in 2011, just as the eurozone crisis was beginning. This may become the first time the central bank manages to ward off a recession.

Yet the politics have got worse. The eurozone crisis sapped trust: creditor countries appeared vindictive to debtors, who, in turn, were cast as lazy spendthrifts. The caricatures — and the divisions they deepened — still resonate today and are evident in the debate over the size and shape of the next EU budget, holding back compromise that would be in everyone’s interest. [...]

Full article on Financial Times (subscription required)

© Financial Times