The economic misery of the Eurozone doesn’t seem to have an end. According to a preliminary estimate by Eurostat, the EU’s statistical service, GDP growth in the 19 member state monetary zone during the second quarter of this year was as miser as ever. On top of that, inflation continues to oscillate around zero, while unemployment is always in the double digit region. Let’s take one thing at a time.
It’s stagnation all the way
Starting from the most important variable, the GDP, Eurostat estimates that in the second quarter of this year the euro area economy grew by just 0.3%, on a quarter to quarter base. Compared with the first quarter, GDP growth has halved. During the last four quarters, starting from the third three month period of 2015, economic growth in Eurozone is stuck in the inglorious region of 1.6%-1.7% on a yearly base. Obviously, this is not enough to effectively tackle the unemployment problem, which especially involves the younger generations.
This brings this analysis to the sorry state of the EU labor market, where the overall percentage of workers without a job culminates to 23.3% in Greece and 19.9% in Spain. Of course, the rate of unemployed youths is invariably double the general percentages. In any case Eurostat “estimates that 20.986 million men and women in the EU28, of whom 16.269 million were in the euro area, were unemployed in June 2016”. This is not a socially, economically and politically viable situation and may lead the EU to catastrophic fallout.
Counting the unemployed
Persistently high unemployment has strengthened the extremists mainly of the right and many EU countries have now grave political problems, with xenophobic, racist and Eurosceptic formations like the French National Front, the Italian Five Star Movement, the German AfD, the Austrian, Swedish, Finnish, Hungarian and many more extreme right parties. From the economic point of view, unemployment deprives Eurozone from the possibility of a new round of growth and has condemned a large part of the population to subsistence livelihood.
The spending capacity misery spate, touching around one third of the population is mirrored on retail sales, an otherwise powerful growth force. For a number of years retail trade sales have been oscillating around the zero level, mostly appearing below it. Again, Eurostat found that this June compared with May, the volume of retail trade sales in the EU28 fell by 0.2% and stagnated in the euro area. In May, retail trade volume marked an increase of some decimal points. Retail trade volumes are the nominal values adjusted for inflation.
The era of too low inflation
This brings us to a most important variable, inflation. That is, the rate of change of consumer prices. No need to recall that, for years Eurozone’s growth misery is tightly correlated with very low inflation rates, below the healthy levels of around 2%. At least this is where the European Central Bank has set the target. Unfortunately, Eurostat estimated the July inflation in Eurozone at 0.2%, far below the ECB target of close to 2%. More than five years now, since the financial crisis of 2008-2010, inflation in the euro area remains at unacceptably low levels, accompanying a long period of recession or stagnation. In June, inflation was even closer to zero at 0.1%.
Even more alarming is the very low rate of change of industrial producer prices. Last week, the EU’s statistical service released its estimate of this variable for June compared with May 2016 at 0.7%. In May, industrial producer prices had risen by the equally meager proportion of 0.6%.
It’s an established fact by now that the expectations of both consumers and producers, about headline inflation and the industrial prices are currently stuck around zero. This is a rather precarious situation, because in case those key economic agents start predicting or even fearing subzero inflation, a vicious cycle may be triggered. Consumers may withhold spending, expecting even lower prices and producers may start cutting down their sale prices in a dangerous self-feeding cycle. This may end up in a catastrophic real economy crash, with all goods losing huge parts or all of their values and all markets collapsing. This can be a real Armageddon in the real economy and can destroy the social and political structures.
No doubt then that the Eurozone economy is in a sorry state. It’s even more disturbing though that there is no visible exit from the tunnel of stagnation, high unemployment and very low or negative inflation.