Last week, Eurostat, the EU statistical service, released its flash estimate of the GDP of the first quarter of 2016, finding it, in both the Eurozone and the EU28, to be 0.5% bigger in comparison to the previous period. In the fourth quarter of 2015, GDP had also grown by 0.3% and 0.4% respectively. Does this mean sustainable growth? Not necessarily, because at the same time Eurostat estimated that, in March 2016 compared with February, industrial production fell by 0.8% in the euro area and by 0.5% in the EU28. In February industrial production had also receded by 1.2% in the euro area and by 1.0% in the EU28.
Summing up, GDP in the euro area increases by less than one percent in three months, but, in contrast, industrial production loses two percentage units in two months. Is this healthy? Rather not. It’s not at all encouraging for the economy as a whole to watch its GDP increasing by some minimal decimal points of a percentage unit and at the same time suffering industrial production losses of two full units. On top of that, there is more discouraging news. Also in March, the volume of retail trade compared with February fell by 0.5% in the euro area of nineteen member states and by 0.7% in the EU28. Undoubtedly, this is another grey indicator about the health of Europe’s economy.
Industry or services?
Of course, some may claim that the European economy has been de-industrializing healthily for two or three decades now by ‘exporting’ industrial jobs to the developing world, while having hugely improved its services sector. Services currently account for more than half of euro area trade surpluses and offer an oversized part of total employment.
There are problems here too though. Even the diamond crown of the services sector, the banking industry, doesn’t seem so healthy, if at all. According to Reuters, last Tuesday, Peter Praet, executive board member and chief economist of the European Central Bank, said: “We have in the sector (banking) a severe profitability shock”. Let’s take one thing at a time, starting from the beginning.
Exporting industrial jobs
For one thing, the services sector may massively offer employment and foreign sales, but it cannot substitute the core role industrial manufacturing plays in any developed economy. Let’s take for example, the two main subsectors of services, tourism and finance. In the good times both may offer a bonanza of jobs, incomes and profits, but if the winds in the world economy become chilly, the financial industry and, up to a certain degree, the tourist sector too, instead of assets become liabilities.
This was obvious during and after the 2008-2010 crisis and may again become the case in the next crisis. Everybody has suffered from the problems with the banks, whereas the grave shock to tourism was not so well broadcasted. Unquestionably, industry suffers from the crisis too, but it always remains the developer of all important innovations in every economy. No country can be characterized as advanced, if it doesn’t possess a strong manufacturing sector, especially in the key sectors of information and communication technologies and automation.
Making China great
For a number of reasons, Europe, and more generally the entire Western economic volume, have willfully transferred industrial production to China and the rest of the developing world. At the same time, they developed their financial sector which today artificially, if not perilously, ‘produces’ a large part of GDP.
In the extreme case of London’s financial hub, which is located on just a square mile of land, it ‘produces’ almost 10% of the Britain’s GDP. Is it healthy? The recurrent financial bubbles prove that it’s not. Only a few decades ago when banks simply accepted deposits and lent out money, their net value added accounted for an utterly tiny part of national income.
In mainland Europe the financial sector is not that overgrown as in Britain, but it ‘produces’ a good part of GDP. Unfortunately, euro area’s banking sector, after having shaken the Old Continent six years ago, is still posing grave problems. According to some sources, euro area banks’ non-performing loans (NPL) have reached one euro trillion. Indicatively, the four Greek systemic banks alone are haunted from a huge sum of €100 billion in bad loans, and, mind you, Greece accounts for only 2.2% of the Eurozone economy.
That’s why Praet seems bewildered with the inability of the banks to produce profits, because in this way they are unable to capitalize themselves let alone to write off a part of the NPL. So, the taxpayer will again be called to finance the bankrupt financial system with real economy’s sweat.
Preat also said that the Eurozone banks should form pan-European entities. Translating his comments about bank profitability and concentration from the constrained language of the central banks into plain words, one could think that euro area’s banking system is in great trouble or even practically bankrupt. In conclusion, Europe, by de-industrializing itself and letting its banking sector to undertake risks it cannot handle, has willingly placed over its head a hanging guillotine blade.