Eurozone: Despite anemic growth and shaky banks marks record trade surplus

Yesterday morning, Eurostat, the EU statistical service, reserved a pleasant surprise to the European decision-makers by announcing its estimates for economic growth during the last quarter of 2013, with all four big Eurozone economies found in the positive part of the chart. Of course this development was not a surprise for Germany, but for both France and Spain a 0.3% growth and 0.1% for Italy was a little expected betterment. Those percentage GDP increases refer to changes compared with the third quarter of 2013. Overall, GDP rose by 0.3% in the euro area (EA17) and by 0.4% in the EU28 during the fourth quarter of 2013, compared with the previous three month period. In the third quarter of 2013, GDP had grown by 0.1% in the euro area and by 0.3% in the EU28. Eurostat also notes that “compared with the same quarter of the previous year, seasonally adjusted GDP rose by 0.5% in the euro area and by 1% in the EU28 in the fourth quarter of 2013, after -0.3% and +0.2% respectively in the previous quarter”. Comparing developments during the last two quarters of 2013, Europe is raising growth speed towards the end of the year. Nevertheless, the whole discussion about growth in the Eurozone is revolving around a few decimals of a percentage unit, far away from what it could be termed as a noticeable development. In addition to this miserable counting of positive decimals, Eurostat found that “over the whole year 2013, GDP fell by 0.4% in the euro area and barely appeared in the positive area with a rise of 0.1% in the EU28”. Financial balancing ahead Undoubtedly, the euro area is still in the stagnation zone, while the US economy is now expanding at the robust tempo of 3.4%. Not to forget though that both those two major western economic entities have ahead of them difficult financial balancing tasks. The US central bank, the Fed under its new leading lady, Janet Yellen, has to call back the trillions it still offers for free to the American banks after the 2008 crisis. Understandably, Yellen has to conduct this battle with the utmost attention, in order to avoid new global fallout. On this side of the Atlantic, the Eurozone has to rehabilitate and consolidate its 6,000 banks, starting from the 130 largest amongst them. Euro area banks have an overstretched balance sheet, almost 3.5 times larger than the regions’ GDP, in relation to only 1.8 times for their US counterparts. In short, Eurozone banks have to cut down both their assets and increase their capital, in order to achieve a sustainable leverage rate. This brings us to the other European front, where Berlin and Paris fight with everybody else, over the shape of the European Banking Union. Banking Union for whom? Next Tuesday, 18 February, the ECOFIN council of the 28 ministers of Finance is to be convened in Brussels. On the previous day, Monday, the Eurozone ministers of Finance are expected to also meet in Brussels. European Sting readers are well informed about the state of things in this front. The problem is that over the next months, some of those 130 major Eurozone banks, accounting for 85% of the entire banking system, may probably have to either be resolved or recapitalized. This past week, Danièle Nouy, Chair of the Supervisory Board of the Banking Supervision section of the European Central Bank, said that the comprehensive assessment of the 130 largest euro area banks, involving asset quality reviews and the stress tests, has to be tough in order to be credible. She added that if a bank has to go, it will go. Obviously this means there will be cases like this and the problem that arises is who and how will pay for the cost of winding down or recapitalizing a medium sized Eurozone bank. Understandably, it will be one or more of the 130 largest institutions the ECB is currently assessing and stress testing, and the cost of resolving such a financial group won’t be small. This is the subject matter of the current stalemate between the European Parliament and the ECOFIN council. Ministers and MEPs clash over the shape and the functioning of the Single Resolution Mechanism (SRM) and the Resolution Fund, which together will constitute the second pillar of the Banking Union. The other leg is the already well-functioning Single Supervision Mechanism managed by Danièle Nouy, under the roof of the European Central Bank. No risks for the euro However, the truth is that, whatever the outcome will be in the fight between the Parliament and the ECOFIN about the shape of the Banking Union, the single euro money is more than safely anchored in Eurozone’s international trade surpluses. Yesterday Eurostat revealed its first estimate for 2013 results in international trade in goods. It said “During 2013, euro area trade in goods recorded a surplus of €153.8 billion, compared with €79.7bn in 2012”. On top of that, every year the Eurozone records an equally hefty surplus in its international trade in services. Given that, the foreign value of the single euro money is more than adequately supported. The proof is that, despite the current problems over the enactment of the Banking Union and the possible winding down of one or more Eurozone banks, the euro still gains more ground with the dollar and the other major world currencies. In any case, during the coming week the Parliament and the Council will certainly find a compromise on which to build the European Banking Union, the most important EU project after the introduction of the euro.