After growth beat expectations, are we too pessimistic about the Eurozone’s chances?
Christian Schulz is senior economist at Berenberg, says Yes.
Remember early October? We’d just learned that German industrial output, factory orders and exports had plummeted in August by the biggest margins since Lehman. Alarm bells rang from Frankfurt to Washington. The reality is less spectacular: Germany entered an economic rough patch. Russia’s aggression against Ukraine triggered a confidence shock, which hurt Germany more than western Europe or the US due to deeper trade links. Fundamentally, Germany is fine: it remains competitive, as solid third quarter export growth shows. Households enjoyed normal wage growth and low inflation, as well as the World Cup victory. It’s a temporary rough patch, not a new crisis. Elsewhere, the Eurozone’s tough love approach of help in return for reforms pays off: Greece joined the recovery of other former crisis countries. There are still problems in Italy and France, but plenty of stimulus in the pipeline and fading external risks prepare the ground for a solid recovery.
Danae Kyriakopoulou is an economist at Centre for Economics and Business Research, says No.
Avoiding recession was good news, but let’s be honest – a 0.8 per cent year-on-year growth rate is hardly a cause for cheer. It is almost a third of what the US saw over the same period and almost a quarter of what the UK achieved. At this pace, it will take GDP two years to reach its pre-crisis peak. And this is against a relatively favourable monetary policy backdrop. Simply avoiding recession is not enough, and pessimism remains warranted. A premature sense of “mission accomplished” risks returning the Eurozone to breaking point. What is needed is policymakers’ strong commitment to support the recovery with any monetary and fiscal tools at their disposal. In other words, the ECB must finally reconsider its allergy to QE. It is time for Germany to take one for the Eurozone team and reconsider its commitment to a balanced budget next year, helping its own economy along the way too.