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Gloomy eurozone prospects

EUROPE'S economy is in a state of fragile recovery, was the cautiously optimistic view of most politicians and economists earlier in the year. But after the last round of figures, nobody is sure any more.

A week ago the announcement by Eurostat, the European Union’s statistical bureau, about the EU’s economic growth made people sit upright. In the eurozone (18 countries), gross domestic product (GDP) remained “stable” during the second quarter of this year, Eurostat said.

Translated into ordinary English: the economy is stagnating.

The GDP of all 28 EU countries taken together showed a slight growth of 0.2%.

Translation: growth Europe-wide is so slight that to all practical intents and purposes, it is stagnating as well.

The figures for the main European economic workhorses do not make one smile either.

In Germany, the economy contracted by 0.2% in the second quarter. Reflecting this, confidence among managers went down by 1.7 points, according to the Institute for Economic Research (IFO) at the Munich University.

IFO president Hans-Werner Sinn did not mince his words when speaking to the authoritative Frankfurter Allgemeine Zeitung: “The German economy is losing momentum,” he said.

For obvious reasons, Chancellor Angela Merkel put a positive spin on the news. She was confident that the net figure for 2014 would still be positive, she told reporters.

France, the eurozone's second-biggest economy, also had little reason to cheer. Unemployment soared to 3.4 million people in June – 10.1% of the total workforce, according to the official French statistics bureau, Insée. Since President François Hollande took over the Elysées Palace in 2012 unemployment has grown by half a million, and there is no prospect of a turning point.

To make things worse, the French economy stagnated in the first two quarters of 2014. This means that the official growth forecast had to be adapted from 1% to 0.5% for this year – and many economists doubt that even this will be reached.

The third-biggest economy, that of Italy, is reeling under a series of hammer blows. Having contracted by 2.4% in 2012 and 1.9% last year, no growth is expected this year. Adjusted for inflation, the country’s GDP is now lower than in 2000.

In other eurozone economies – Spain, Italy, Greece and Belgium – the prospects are equally gloomy after a recovery seemed on the cards. Perhaps the one exception is the Netherlands, where things are looking up a bit. But even here recovery is very fragile.

This economic stagnation is made worse by the possibility of deflation – the opposite of inflation. Inflation, according to an announcement by Eurostat, is down to an all-time low of 0.4% in the eurozone. In several countries, especially Greece, Bulgaria, Spain and Portugal, prices dropped.

This is dangerous. Interest rates are so low that people do not save money any more, thereby depriving banks from capital to lend. And that, in turn, means that investment – and therefore growth – is curtailed.

US bucks the downward trend

All of this is in stark contrast to what is happening in the USA. IHS, an American research group, estimates a growth of 3% for 2014.

In the New York Times, IHS researcher Nariman Behravesh was quoted as saying: “The US economy is on solid ground. Europe is struggling, Japan is struggling, but all of this suggests the US is doing quite well.”

What are the reasons for the malaise?

In France, one could plead domestic political grounds. Differences of opinion about economic policy caused three cabinet members, including the minister of economic affairs, Arnaud Montebourg, to resign because they thought Hollande did not do enough to stimulate growth.

But this does not explain the Europe-wide figures. Many observers look for the main reason in recent geopolitical events, mainly the possibility of a war between Russia and the Ukraine, as well as the advance by Islamic State (IS) terrorists in Iraq and Syria. The mutual sanctions between the West and Russia have also dampened confidence.

Mario Draghi, president of the European Central Bank, has hinted that he might start printing money in order to induce some inflation and counter the possibility of deflation. It would also drive the euro’s international value against the US dollar down, thereby making European exports cheaper.

For South Africa, European economic woes are important. Although our trade with Asia and Latin America has improved considerably over the last decade or two, Europe still remains our main trading partner.

When the European economy sputters, their imports go down, and our exports are affected.

There is not all that much that South Africa can do beyond widening our trade relations with other parts of the world. But even then, when Europe is in difficulties it will necessarily impact other regions, and this will also have negative consequences for us.

What we can do, of course, is to get our own house in order. We can do much more to combat corruption, we can appoint able people in important positions (instead of rewarding incompetent political pals of the president), and we can follow sound economic policies.

Do all of this, and South Africa may find itself in a strong position once the present crisis is over.

 - Fin24
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