Wolfgang Munchau: Do not kid yourself that the eurozone is recovering:
The main constraint on the resumption of growth is the failure to clean up the banking sector. Europe’s political leaders have seized on the first uptick in European economic indicators as evidence that their policies are working. Who would have thought that? Eurozone gross domestic product expanded 0.3 per cent in the second quarter of this year. It will probably have expanded again in the third quarter….
Comparing the first half of 2007 and the first half of 2013, real GDP contracted by an accumulated 1.3 per cent in the eurozone, 5.3 per cent in Spain and 8.4 per cent in Italy. In the same period investment was down by an accumulated 19 per cent in the eurozone – and 38 per cent in Spain and 27 per cent in Italy. Between the first quarter of 2007 and the first quarter of 2013, employment fell 17 per cent in Spain and 2 per cent in Italy. I would not call the end of the recession until we see a sustained improvement in growth and employment….
Italy is stuck with a combination of an unsustainable high level of public debt and no productivity growth. It has essentially two options to adjust--become like Germany, or leave the eurozone. The country is unable to do the first, and unwilling to do the latter. As the economists Francesco Giavazzi and Alberto Alesina calculated in an article in Corriere della Sera last week, it would cost some €50bn to reduce the tax wedge… to German levels. There is simply no political majority in sight for such radicalism…. The country will be able to muddle through for a while….
Meanwhile, the single largest constraint on the resumption of eurozone growth is not fiscal policy--which is broadly neutral at present across the single currency area--but the continued failure to clean up the banks. The growth rate of loans to the non-financial sector turned negative in 2009…. The economy will teeter on the brink of zero or low growth for the foreseeable future because the financial sector is not supplying the economy with sufficient funds to expand….
The recession that started in 2008 continues, once you ditch the silly obsession with two consecutive quarters. It is not about to end.