Lea, the bank’s economic adviser, director, confirmed that while peripheral countries have benefited greatly from a general reappraisal of risk by investors – as “angst” about the breakup of the eurozone has faded and worries about emerging markets have mounted – big risks remain.
With Spain, as well as France, missing explicit deficit targets, much interest in the coming months will be on whether these countries will be expected to impose further cuts or whether the European Commission will ease austerity demands. Tighter conditions in the US, which could reverse some recent gains, are also of concern.
Said Lea: “Disparate inflation rates are a necessary part of the, very painful, adjustment process. And so are unit labour costs. [There has been a] lack of progress experienced by the major and peripheral Eurozone economies in terms of unit labour costs. This confirms that, whilst Spain, Portugal, Ireland and Greece have improved their competitiveness, the French and Italian economies have made no progress at all.”
Diverse performance
On inflation, she adds: “Germany and France had rates around 1% in February, whilst the peripheral countries have very low rates (Spain, Ireland) or falling prices (Portugal, Greece). But the diverse inflation performance should come as no surprise.
“In the absence of the devaluation option, the less competitive peripheral economies have to improve their competitiveness by internal devaluation (deflation) if they are to compete and recover.”
In GDP terms, Germany was the best-performing major economy in 2013, registering growth of 0.4%; still Lea remains sceptical about the long-term prospects for this “powerhouse” for European economic growth.
She adds: “Germany is expected to grow just short of 2% this year, but if it is supposed to be the great engine room for growth, then I’m not that impressed. The demographics are certainly not that great, and it won’t be the fast-growing economy going forward.
“UN figures have shown recently that Germany has a much older population than other parts of Europe, while the UK and France are examples of countries without demographic difficulties.”
In line with the characteristics of previous recoveries following deep financial crises, Lea maintains that the current upturn is actually proving rather muted overall.
“Given the high unemployment rates in many of the eurozone’s member states, worries about deflation, the continued problems in the banking sectors in some non-core countries and the continued need for austerity, it would be premature to assume that the eurozone’s difficulties are behind it.”
