Eurozone’s north-south growth gap to become structural

Olli Rehn, Vice-President of the European Commission in charge of Economic and Monetary Affairs and the Euro, participated in the festivities to celebrate the enlargement of the euro area to include Latvia as from 1 January 2014. (EC Audiovisual 9/7/2013).

Early last Wednesday European Sting writer Elias Lacon stressed that “Eurozone banks are unable to support real economy’s dawning growth”. Hours later on the same day Eurostat, the EU statistical service, announced its flash estimate for the second quarter of 2013 euro area and EU27 growth and informed us that both those economic volumes recorded a GDP increase of 0.3%. Of course this is a very weak growth rate to support any triumphant comments for an ‘advent’ of a mew period of economic expansion in the European Union. However Lacon combined some other positive data on Eurozone’s economy and concluded that, “Industrial production in the European Union is definitively in a virtuous path as statistical data confirm business managers’ assessment, that their order books are as full as they have never been in the past”. The question is whose order books are full? Averaging is the best way to hide reality.

Eurozone’s duality

Undoubtedly half or more of Eurozone’s economy is still in a helpless state. Unemployment and recession torment Greece, Italy, Spain, Portugal, and Ireland and to a great extent also France, without any hope for a tangible betterment in the foreseeable future. One major impediment for those countries to enter a growth path is the inability of the banking sector to actively support small and medium enterprises realize their investment plans.

Under the circumstances only Germany succeeds to increase its GDP albeit mildly, while everybody else remains in the negative side. This arrangement risks however to become permanent, establishing a standard duality in Eurozone. If the banks will not be able soon to perform their role and adequately finance the SMEs in the entire Union, this duality may become structural. The variable degrees of liquidity lack in half of Eurozone countries constitute the major impediment of growth.

Unfortunately the EU Commission Vice President Ollie Rehn responsible for finance and the euro doesn’t see it this way. After Eurostat announced its flash estimate for an overall growth of 0.3% in Eurozone during the second quarter of 2013, he rushed to state that this data confirm the correctness of the applied economic policies, the major characteristics of which are the severe austerity and the deregulation of all Eurozone markets. He stated that “The data also supports, in my view, the fundamentals of our crisis response: a policy mix where building a stability culture and pursuing structural reforms supportive of growth and jobs go hand in hand”.

It is remarkable how blind a top official can be, not being able to see that not only Italy, Greece, Spain, Portugal, Cyprus and Ireland are still in recession but now even Holland has joined the club of shrinking economies. As for the 0.5% growth rate estimated for the second quarter in France, a lot of people believe that it may turn negative soon, despite the larger than expected government spending in this country. Without large government subsidies to the French business sector, like the state guarantee to a huge Peugeot – Citroen loan, the French economy would have already started counting GDP losses, while unemployment is always on the rise.

Rehn though is not totally blind. He still sees that something wrong is going on in more than half of Eurozone. After congratulating himself about the correctness of the applied economic policies he steps back a bit to have a fuller image of the map. He added then that, “There are still substantial obstacles to overcome: the growth figures remain low and the tentative signs of growth are still fragile; the averages hide important differences between Member States, a number of Member States still have unacceptably high unemployment rates; the implementation of essential but difficult reforms across the EU is still in its early stages … So there is still a very long way to go”.

Not a word about the egotistic and anti-social role of the banking system, which despite the ongoing credit crisis didn’t hesitate during the past three to four years to increase its risky bets using other people’s money. Today, the sum of risks that the Eurozone banks have undertaken in their balance sheets surpasses the triple of Eurozone’s GDP. Much of these ‘investments’ have already gone sour and have to be totally or partially written off. Only God knows what else the banks hide in their off-balance-sheet accounts.

The Commission knows

Despite the fact that the Commission has repeatedly in the past denounced the banks for having usurped almost €4 trillions of Eurozone taxpayers’ money, now it forgets to state the obvious. The simple truth is that the Eurozone banks and mainly the German ones have gone completely out of control and must the soonest possible be strictly regulated, or half of Eurozone will remain in permanent recession. If the banking sector remains completely uncontrolled, the lenders will never return to their original role, serving the real economy, more so where those services are particularly needed. In this way the north-south Eurozone growth gap is to become structural.