Good news from Europe, but recovery still far away

At last, some good economic news from Europe: the euro zone has emerged from its worst recession since World War II. But while the latest figures from the Eurostat statistics office are welcome, the road to recovery is a long, rocky and uneven one. Even Mr Olli Rehn, who is responsible for economic affairs in the European Commission and whose job is to be perennially optimistic, warned in a statement from Brussels on Wednesday: "Self-congratulatory statements suggesting 'the crisis is over' are not for today."

According to Eurostat, the combined economic output of the group of 17 euro zone countries grew by 0.3 per cent during the second quarter of this year, compared with the previous quarter. France posted growth of 0.5 per cent, and even Portugal, one of Europe's poorest nations, clocked up 1.1 per cent.

But it is significant that, just as it was German cash which saved Europe from bankruptcy, it is only Germany's solid economic performance which is pulling its neighbours out of recession: without the 0.7 per cent German growth, Europe would have continued to languish.

And there are serious doubts that the German engine can continue pulling Europe's rickety economic train, largely because Germany's key export markets - China and Russia - are both experiencing difficulties. "An export growth of 3.5 per cent, which we originally expected, will now be very difficult to achieve," says Mr Markus Kerber, chief executive of the BDI, the federation of German industry, in a statement posted on the organisation's website. Europe's recovery is, therefore, very vulnerable.

It is also very selective. The economies of Italy and Spain - Europe's third- and fourth-largest respectively - continue to shrink, albeit at a slower pace.

And sobering figures from the Netherlands, where the national economy shrank by 0.2 per cent, are a reminder that even some of the continent's best-governed nations remain at risk.

Even if this recovery is sustained, it is as yet far too shallow to make a real difference to ordinary Europeans.

As a whole, the euro zone economy remains 3 per cent smaller today than at the start of 2008, when the global financial crisis hit; unemployment in the euro zone now stands at a record 12.1 per cent, with more than double that rate for young job-seekers.

And because the continent's rigid labour laws make it very difficult to sack workers, potential employers remain cautious about hiring. Based on experience, it takes an annualised economic growth of around 2 per cent to shave off 1 per cent of EU unemployment; Europe's current performance is about half that, on an annualised basis.

The stability of some of Europe's banks is also questionable, making it impossible to envisage a rise in corporate lending and, therefore, a boost in production. And consumer spending will also remain weak, partly because the spectre of unemployment spooks ordinary Europeans, but also because household savings are already weak and consumer credit difficult to obtain.

And then, there are the sovereign debts of European governments, the chief reason for the financial crisis in the first place.

In theory, growth should make these debts more sustainable, since it increases tax revenues and the governments' ability to repay. But the reality is the recovery will have to be four to five times bigger than it is now before countries like Greece or Portugal can reverse their debt quagmire and increase national spending.

For the moment, the debt problem is actually getting worse.

Greece's overall debt was 124 per cent of its gross domestic product when the crisis began in 2009, but it is 170 per cent today; Portugal's debt was 90 per cent of GDP and it is 121 per cent today. A new debt rescheduling will still have to be undertaken, paid - as usual - mainly by Germany's long-suffering taxpayers.

This is not to say the current uptick is irrelevant. It allows governments to claim their austerity policies are working, and that the economic pain was worthwhile. It will also make it easier to borrow at cheaper rates. But what it will not do is alleviate Europe's fundamental economic malaise.

European governments hoped that their experience will mirror that of Asia in 1997, when a short financial crisis was followed by a quick and sustained recovery.

But as Professor Barry Eichengreen, a distinguished economist at the University of California, recently predicted, Europe's experience is more likely to resemble that of Latin America during the 1980s: of economies staggering with low growth for a decade.

jonathan.eyal@gmail.com

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