In his latest paper, ‘Does the return to growth mean the eurozone debt crisis is finally over?’ the director of global strategy warned of false dawns, stating many commentators have underestimated the economic damage caused by the sovereign debt crisis.
While the currency zone has emerged from recession after six consecutive quarters of negative growth, the GDP figure came in at 0.3% – above analysts’ expectations – and he said optimism is on the rise again.
Peripheral Europe is looking less bad than it has since the crisis. In Greece, Scott’s research points out the economy shrank by -4.6% in Q2 compared with a -5.6% contraction in the first quarter – again, better than market forecasts.
Spain reported its first reduction in unemployment in two years, as the figure fell from 27.2% to 26.3% and Portugal’s GDP grew by 1.1%.
But Scott said things are not necessarily good, just “less bad”.
The good, the bad, the ugly
He added: “Spain, Greece and Italy remain in recession and even the Netherlands, regarded as a core country, contracted during the last quarter as the economy remains saddled by a large quantity of mortgage debt.”
Scott accused commentators who believe the crisis to be over of taking a simplistic view, given the complexities of a currency union made up of 17 different countries with different languages, cultures, political systems as still a long way from resolution, due largely to the policy mistakes made by the Troika – the EC, IMF and ECB.
In addition, he pointed out market optimists had neglected to recognise the role of the banking sector, adding it remains significantly undercapitalised in light of Basel 3 and while boosting the bond markets, the levels of debt held by individual countries casts doubt over the strength of their finances.
Scott concludes: “As the eurozone moves back into growth territory it would normally be expected GDP would accelerate to what analysts term ‘escape velocity’. This means that growth will be sufficiently fast for debt levels to fall and credit growth to accelerate. However, the constraints on growth are likely to remain too large for this to happen because of the political and financial architecture of the currency union.
“In the absence of a financial shock, the status quo is likely to continue with the Troika providing the necessary crisis support to prevent contagion and keep bond yields suppressed. It is not a solution, however, and the divergent nature of the currency union will mean growth remains elusive without the necessary fundamental reforms.”
