Nascent Recovery Hope for the Euro Zone

All indicators point to growth in the large euro countries. Spain, in particular, is recovering and outpacing growth in Germany.
Car exports from Spain are expected to contribute to economic recovery. Photo: Bloomberg

After years of crisis, there is now hope for the economy in the 19-nation euro zone. In their joint economic outlook for the euro zone, the economic experts at the German Ifo Institute for Economic Research, together with the offices of statistics in France and Italy, expect to see last year's moderate recovery continue in 2017.

"It is a positive sign that growth and inflation in the euro zone are increasing slightly, despite the uncertainty related to Trump and the Brexit," said Ifo President Clemens Fuest.

Marcel Fratzscher of the DIW Berlin economic research institute even sees the euro zone "on a promising path to recovery," he told Handelsblatt.

"As a patient, the euro zone is on the mend, as the medicine of economic reforms takes effect," he said, criticizing "the widespread cynicism in Germany toward the economic performance of our neighbors," which is "inappropriate."

He believes that southern European countries will deliver a positive surprise this year.

Christoph Schmidt, president of the RWI Research Institute and head of the German Council of Economic Experts, has a more restrained view of southern European countries.

"Economic development in the last quarter of 2016 was apparently more favorable than expected some time ago," he told Handelsblatt, while pointing out the many uncertainties, from Brexit and Donald Trump to this year's elections in the Netherlands, France, Italy and Germany. The economic outlook, published on Wednesday, notes that no one knows what sort of economic policy the new U.S. president will pursue.

12 p10 Developments in the Euro Area-01

Mrs. Fratzscher, Schmidt and Fuest all base their differing assessments on the same facts. In the last quarter of 2016, industrial production, the gross domestic product, consumption and investments improved at a faster rate than expected, with GDP growth in the euro zone reaching 1.6 percent. According to the new economic outlook, this trend will continue at the same rate in the first half of 2016.

As in Germany, growth is supported primarily by consumption, because unemployment is declining and wages are rising. Low interest rates support the growth in investment. In particular, development in the three large southern European economies contributed to the improvement in the situation.

Among the four large economies, Spain has seen a stronger recovery than Germany since 2016. With 3.2 percent growth, the Spanish economy grew at the fastest rate last year. Its debt-ridden companies and citizens benefited from the European Central Bank's low interest policy and the low price of oil – and, most of all, from record tourism.

After the attacks in France, North Africa and Turkey, many vacationers opted for Spanish beaches in 2016. Not even the negotiations, which have lasted almost a year, on the formation of a new government have dampened the post-crisis boom.

Most Spanish experts expect 2.5 percent growth for 2017. The somewhat less optimistic prognosis is the result of uncertainty over whether the minority government of Prime Minister Mariano Rajoy will remain capable of introducing reforms.

Italy, on the other hand, is still suffering from the consequences of a three-year recession, which cost almost 8 percent of its GDP in 2015. "The recovery is underway, but it will be slow," said Paolo Mameli, chief economist at major bank Intesa Sanpaolo.

The government expects 1 percent growth for 2017, following 0.8 percent last year. The high level of debt and weakness in the banking sector are clouding the outlook, and yet there is also hope in Italy. Unemployment is at 11.9 percent but is slowly declining. That includes youth unemployment, which was 36.4 percent. Consumer confidence is up, thanks to higher purchasing power for families. Economic experts now hope that industry will abandon its previous reluctance to make investments.

In France, the presidential election could become the key factor for growth. Business owners, who have been complaining about the ruling Socialists for years, could see a conservative win the election, although this will be accompanied by a decline in growth. The Conservative candidate wants to lower the income tax and pay for it with a higher value-added tax. How this affects the economy will depend on how the tax cut and tax increase are staggered.

Following optimistic prognoses at the end of the year, most official prognoses (Banque de France, European Commission, OECD, the Standard & Poor's rating agency) now expect growth of only 1.3 percent for 2017, as well as for 2016. The government expects 1.5 percent, while experts with major bank Natixis are predicting only 1 percent growth, primarily because of the rising price of oil. S&P chief economist Jean-Michel Six believes that the 2016 recovery is losing steam. As government programs for public-sector jobs and retraining expire, unemployment will decline at a slower pace than last year.

Nevertheless, DIW chief Fratzscher believes that in 2017 the French economy will grow at a faster pace than the economy in Germany, where the government expects 1.4 percent growth.

"Here in Germany, we need to acknowledge the reform achievements of other Europeans," he said. The loss of interest in reforms has been more of a problem in Germany recently than in many other countries, he added.


Donata Riedel covers economic policy, Thomas Hanke is Handelsblatt's correspondent in Paris, Regina Krieger is the Italy correspondent, Sandra Louven is the Madrid correspondent. To contact the authors: [email protected][email protected][email protected][email protected]