Eurozone: GDP development heads to naught; the expensive euro serves only Germany

Ferdinando Nelli Feroci, Vice President designate of the European Commission in charge of Industry and Entrepreneurship, Pierluigi Gilibert, CEO of the European Investment Fund (EIF), Marco Peronaci, Deputy Permanent Representative of Italy to the EC, and Daniel Calleja Crespo, Director General of DG Enterprise and Industry of the EC, and SME Envoy of the EC, participated in the signature ceremony of the agreement between the EC and the EIF to boost funding opportunities for SMEs. The agreement was signed by Gilibert, on the left, and Calleja Crespo, in the presence of Peronaci, standing on the left, and Nelli Feroci, standing on the right. (EC Audiovisual Services 22/07/2014).

A new Eurostat wave of data statistically confirmed that Eurozone is utterly moored in economic stagnation, with disturbing signs that this might even turn to recession. Most significantly, last week the EU statistical service issued an estimate that the euro area GDP idled with a zero growth rate during the second quarter. The same source released final data on June industrial production, finding it 0.3% less compared with May. Last but not least, Eurostat confirmed its flash estimate of 31 July about same month inflation, ruling that it certainly dived further to 0.4% from 0.5% in June, thus establishing a disinflation (falling inflation) trap, which may lead to deflation (negative inflation). Let’s take one thing at a time.

Starting from growth or rather the lack of it, GDP evolution during the past three-quarters is very telling. In the last three months of 2013 gross domestic product in the euro area grew by a mere 0.3% on a quarter to quarter base. Then, in the first three months of this year GDP progress was further weakened to 0.2%, while in the April-May-June period it levelled out to naught. The falling tendency of the vital growth rate must have shocked the European Central Bank governors, but didn’t bother the decision makers in the government quarters of Brussels and Berlin. This observation is based on the fact that only the ECB took extraordinary measures to counter the economic stagnation and the disinflation trend.

Who cares about growth

ECB’s recent additional nonconventional monetary tools, apparently targeted to help the SMEs get some badly needed financing, are expected to have another important growth effect in making euro a bit cheaper. They have already driven the parity of euro with the other major world currencies to a lower level. A discounted euro will have a significant growth impact, by making Eurozone products and services more competitive in world markets and rendering imports more expensive.

Unfortunately, the so far recorded fall of the euro parity is not enough to help the SMEs in Italy, Spain, Greece and Portugal sell more to overseas buyers. A lot more is needed on the monetary front to make euro pricing more competitive. But the ECB doesn’t seem ready to adopt a clear monetary policy of quantitative easing, capable of bringing the euro/dollar parity to 1.2-1.25 level. Germany blocks an effective support of real economy growth with monetary means. Berlin knows only one way to competitiveness: hard labour…

Industry recedes further

Regrettably, it’s not only the zero GDP growth that darkens Eurozone horizons. Industrial production is also falling. According to Eurostat, “In June 2014 compared with May 2014, seasonally adjusted industrial production fell by 0.3% in the euro area (EA18) and by 0.1% in the EU28… In May 2014 industrial production decreased by 1.1% in both zones…”. On a yearly base, industrial production in June remained unchanged compared with the same month of 2013. The same source states that, “ The decrease of 0.3% in industrial production in the euro area in June 2014, compared with May 2014, is due to production of non-durable consumer goods falling by 1.9% and energy by 0.7%”. Unquestionably, the European industry is not now at its best, due to the very expensive euro and the anaemic internal demand.

Inflation nears naught

Concerning inflation, Eurostat confirmed its flash estimate of July price change at a meagre 0.4%, the lowest rate since October 2009. It is even more worrisome that on a monthly base inflation was negative with a -0.7% quotation. Many countries are still suffering of deflation. Eurostat found that “In July 2014, negative annual rates were observed in Bulgaria (-1.1%), Greece (-0.8%), Portugal (-0.7%), Spain (-0.4%) and Slovakia (-0.2%)… Compared with June 2014, annual inflation fell in thirteen Member States…”. Visibly the member states which experienced the worst crisis are still agonizing in the negative part of the chart.

Undoubtedly, Europe is still stagnant and the only light in the tunnel has been lit by the ECB, with its one trillion of additional extraordinary financing. However, the announcement of this plan has caused only a small fall of the euro parity in relation to other currencies, which is not enough to bolster the real economy in more than half Eurozone countries, including France. On top of that, the time horizon set by the ECB for these new measures to exert their full effect, spans two years. It’s highly questionable if many member states can wait that long, without reaching uncharted waters.

The Brussels bureaucracy, under the new Commission President Jean-Claude Juncker, has to intervene in the fiscal front. Juncker can use the Commission’s power of discretion and relax the strict austerity imposed on many countries. The ECB alone cannot revive the real economy with monetary measures. The governments in Germany and the other central member states have to agree to much-needed measures, facilitating investments and consumption in the real economy.