Shafts of sunlight amid Europe’s economic gloom

In Florence’s Bargello museum stands Donatello’s bronze statue of David, in a straw hat and calf-length boots, victorious over Goliath. If he were alive today to recast his sculpture on a topical European theme, the great Renaissance artist might be tempted to show Goliath as the eurozone, dressed in a suit and triumphant over David, a Greek youth wearing no tie.

The confirmation that Greece’s European creditors hold the upper hand over its radical leftist leaders by no means heralds a resolution of the debt crisis. A lack of mutual trust permeates this week’s interim agreement between Athens and its partners. The Greek economy and financial system are more precariously positioned than before the January 25 election that catapulted the left-of-centre Syriza party into power.

But the deal offers space for Europe to build on various positive developments that, so to speak, were airing on other channels as everyone watched the latest episode of the Greek drama. None of these alters the point that much remains to be fixed in the eurozone, but they do suggest that patches of sunlight are breaking through the clouds.

Take Germany, which is under pressure from its European partners — not to mention the US and the International Monetary Fund — to boost domestic demand in order to rebalance the eurozone economy and avert a drift into deflation. On Tuesday, employers struck a deal with the IG Metall trade union that awarded a 3.4 per cent pay rise, plus a one-off payment of €150, to workers in the state of Baden-Württemberg.

This increase is the highest of its kind since 2007 and is way above Germany’s annual inflation rate (prices actually fell in January by 0.4 per cent). It will serve as a model for national wage deals, covering not only the rest of the 3.7m employees represented by IG Metall, but workers in the chemical industry and other important sectors.

Higher German wages will not rescue the eurozone from its woes. But the pay deals ought to make some contribution to preventing deflation and raising demand in the eurozone, because Germany accounts for more than a quarter of the area’s economic output.

Germany is famously a nation of savers but, according to a survey released today by the GfK market research group, the willingness of Germans to make purchases is now at its highest level since December 2006. Conversely, their willingness to save stands at a record low.


The beneficial impact of these trends will in principle be enhanced by the euro’s decline on foreign exchange markets, which should boost exports; by low oil prices; and by the imminent launch of the European Central Bank’s ex­panded asset purchase programme, which will include eurozone government bonds and amount to €60bn a month. In Spain, whose economy grew in the final three months of 2014 at 0.7 per cent, its fastest quarter-on-quarter rate for seven years, an upswing is already well on its way. Meanwhile, latest figures show that bank loans to the private sector in the 19-nation eurozone rose in January for the second successive month.

Apart from Greece, the eurozone’s biggest concern in recent times has been the unwillingness or inability of France and Italy, the area’s second and third biggest economies, to grasp the nettle of reform by confronting vested interests in business, trade unions, professional orders and the bureaucracy. But even here some progress is being recorded.

Matteo Renzi, Italy’s centre-left prime minister, demonstrated his command of the political scene in January by deftly engineering the election of Sergio Mattarella, his candidate, as the nation’s president. His victory strengthens his hand as he prepares to introduce long-overdue reforms of the labour markets and electoral system.

Similarly, François Hollande and Manuel Valls, France’s president and prime minister, deserve credit for neutralising a rebellion in their Socialist party this month and ramming a set of business-friendly reforms through parliament. It was a display of determination unmatched since the Socialists’ presidential and legislative election victories of 2012. Mr Valls now promises to present a more ambitious bill to shake up industrial relations and give small companies an incentive to expand their workforces.


All these positive tendencies must be kept in perspective. The French reforms are modest in scope, and the far-right National Front is poised to inflict a heavy blow on the government — and the political establishment in general — in regional elections scheduled for March 22-29. The outlook for political stability and economic reform in Spain, after a general election due by December, is uncertain thanks to the rise of unconventional parties such as Podemos on the left and, to a lesser extent, Ciudadanos in the centre.

Outside the eurozone, two challenges — neither of which lends itself to easy answers — lie ahead. The first is the UK’s future in the EU, which may need urgent attention after the British election on May 7. The second is Russian-backed separatism in Ukraine and the unfolding threats to European security.

The growth of anti-establishment political forces, the UK problem and Ukraine remind us that fixing Europe will never be about economics alone. But, at least on the economic front, the year has begun with encouraging signs.




Tony Barber




Fonte: FT