The Next Eurozone Crisis Has Already Started
By Matthew Lynn
The Telegraph, London
Friday, January 11, 2019
Industrial output is in crashing. Retail sales have stagnated. Business confidence has dropped, and investment is heading south. A sharp slowdown might have been expected for Britain heading out of the European Union, America where the President is busily ripping up half a century worth of carefully constructed trade agreements, or China, which has been on a decade of wild, credit-fuelled growth. But the real slowdown is happening in the one place where few economists expected it. It is now painfully obvious that the eurozone is heading into a sharp recession.
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The numbers coming out of all its main economies, from Germany to France, Italy and Spain, are relentlessly bad. What does that mean? Far from winding up quantitative easing, the European Central Bank will be forced to step in with emergency measures to rescue a failing economy -- but it may well prove too little, too late. 2018 was meant to be the year when the eurozone consolidated its steady recovery, agreed on reforms to fix the flaws in the single currency, pressed forward with reforms to boost its competitiveness, and gave the rest of the world a lesson in balanced, sustainable growth. Over the past year, a ton of investors' money has bought into the Euro-boom story. Steady recovery would drive voters away from populist parties, encourage reform, and create a virtuous circle of expansion and renewal. The script has not quite worked out as planned, however. Todaybought yet another wave of disappointing numbers. Italian industrial production was down 2.6 percent year on year. In Spain, industrial output was also down 2.6 percent, the fastest rate of contraction since May 2013. The day before, we learned that French industrial output was down by 1.3 percent in November, and Germany, which is meant to be the main engine of the continent, recorded a decline 1.9 percent for the month, as well as re-calculating October's data to show a steeper drop than reported earlier. The eurozone is now seeing a synchronised slowdown right across all its major economies. Germany looks certain to be in technical recession, defined as two consecutive quarters of shrinking output, and France and Italy will not be far behind. Spain, which had been growing faster than most of the continent, is slowing and so will the smaller economies. Add all that up, and it clear the whole continent is heading into a fresh downturn, even though employment and output have yet to recover their 2008 levels. Sure, there are some special factors to explain that. German industry has been hit by the slowdown of its massive auto industry, and especially the re-tooling of factories to meet new diesel and regulatory standards. In France, the Gilets Jaunes protestors haven't exactly helped: riots and boarded up shops are not the kind of thing that encourages people to go out and spend money, even in a county that is used to protests. Italy is engulfed in a political fight with Brussels over its budget policies and is suffering a fresh round of banking problems. Arguably, once those are overcome, growth will get back to normal. Well, perhaps. The trouble is, those sound suspiciously like excuses. In fact, every economy always faces a few challenges, and the eurozone's are no worse than anyone else's. Indeed, they look relatively mild compared to many of its competitors. The UK has to contend with the chaos of Brexit, and the United States with rising interest rates, and rising protectionism. Even so, both are now growing faster. In fact, there are two big weaknesses. First, led by Germany, the whole of Europe has allowed itself to become dangerously dependent on exports. The German trade surplus at more than 8 percent of GDP leaves that country brutally exposed to the cross-winds of global trade. But it not just Germany. In 2017, the surplus for the zone as a whole hit a massive E345 billion, up from E207 billion five years earlier. The whole continent is hooked on exports. Talk of trade wars, a slowdown in China, and a hit to the emerging markets all mean the European economy suffers first from any slowdown (Brexit is hardly helping either, with Germany's surplus with the UK already narrowing and likely to fall further). An export-led model is great when the global economy is expanding – but can turn against you very quickly. Next, the euro remains a relentlessly deflationary currency that has ripped demand out of whole economies. With weakened banking systems, towering imbalances between the core and the periphery, puny wage growth, relentless austerity, and mass unemployment, it has proved itself over two decades incapable of generating any meaningful internal demand. Most countries can reflate their economies with consumer spending, easier credit, and a cheaper currency. The euro-zone can't do any of that. The fleeting recovery of the 2017 and early 2018 now looks to have been fuelled purely by the two trillion of freshly minted euros the ECB threw at the economy. It has proved incapable of creating a self-sustaining recovery. Th ECB was expected to start normalising policy this year, ending QE and raising interest rates. In the face of the latest data, a rise in rates can now be ruled out. The central bank is far more likely to have to start printing money again by the spring -- but by then it may already be too late to pull the zone out of a slump.
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