Eurozone needs more than some decimals of growth

László Andor, Member of the European Commission in charge of Employment, Social Affairs and Inclusion, (1st from the right) went to Riga where he was received by Valdis Dombrovskis, Latvian Prime Minister (1st from the left). Inna Šteinbuka, Head of the Representation of the EC in Latvia (2nd from the right), (EC Audiovisual Services, 03/06/2013).

László Andor, Member of the European Commission in charge of Employment, Social Affairs and Inclusion, (1st from the right) went to Riga where he was received by Valdis Dombrovskis, Latvian Prime Minister (1st from the left). Inna Šteinbuka, Head of the Representation of the EC in Latvia (2nd from the right), (EC Audiovisual Services, 03/06/2013).

Despite the ambivalent mood within and without Europe for the euro area’s economic prospects, some factual developments do not seem to be discouraging. For one thing the Commission gave yesterday the green light for Latvia to adopt the euro and join the Eurozone as from 1 January 2014. The solid decisiveness of this country during the past few difficult years to join the Eurozone is a vote of confidence for the single money area.

Passing now to the latest data on the evolution of Eurozone’s GDP, Eurostat, the EU’s statistical service, found that during the first three months of 2013 it moved slightly below the zero change level. According to this source, “GDP fell by 0.2% in the euro area during the first quarter of 2013, compared with the previous quarter… In the fourth quarter of 2012, the growth rate was -0.6%”.

In view of this the obvious comment is that the rate of fall of GDP from the last quarter of 2012 to the first quarter of this year decreased substantially from -0.6% to -0.2%. This is not a small thing, but not a great achievement either. The rate of fall between the two quarters was reduced to one-third and in 2013 came much nearer to the zero change level. If the same tendency continuous throughout this year, it is highly possible that those who predict real growth, albeit small, during the second half of 2013 will be justified by real developments.

It is interesting to note also that in the first quarter of 2013, household final consumption expenditure rose slightly by 0.1% in both the euro area and the EU27. In any case the most important segment of total demand, which is consumption, remains in the positive level. Not to forget that consumption formulates more or less the ¾ of the GDP. If the consumption path remains above the zero level all along this year it is highly possible that Eurozone will finally abandon the recession area and enter into a new growth period. The large discrepancies however between north and south will persist.

Unfortunately not all indicators move to the positive direction for Eurozone. Retail sales remain in the negative region. According to Eurostat, “In April 2013, compared with March 2013, the volume of retail trade fell by 0.5% in the euro area and by 0.7% in the EU27. In March retail trade sales decreased by 0.2% and 0.1% respectively”. In this case the negative pace seems to have increased from March to April. This development however is in a direct antithesis with the positive course of consumption. Theoretically, those two variables, consumption and retail sales, are measuring almost the same thing.

Negative developments in Eurozone are also recorded in the course of gross capital formation. Always according to Eurostat, during the first quarter of 2013, “In both the euro area and the EU27, gross fixed capital formation contributed negatively to GDP growth (-0.3 percentage points and -0.2 pp respectively), while the contributions of household final consumption expenditure and change in inventories were neutral in the euro area (0.0 pp each) and slightly positive in the EU27 (+0.1 pp each)”.
Taking all that into account there is no doubt that Eurozone’s economy is not growing.

It is more discouraging though to observe, that even if the euro area as a total enters in a slow growth course during the second half of the year, unemployment in the recession stricken countries of the south will remain around its present levels. Actually the jobless rates are predicted to increase in Greece, Spain, Italy and Portugal.

In reality an eventual positive overall development in the rate of change of the GDP towards the end of the year, will mean almost nothing for those countries. Without ground-breaking policy changes and in the absence of wide-ranging growth supporting measures, Eurozone will remain as fragmented as ever in every respect. It is an absurdity to think that substantial parts of entire populations could seek and find jobs in the north.

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