Sunday, February 18, 2018
Blooming Europe needs to grasp the nettle of reform
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

As impressive recoveries go, it is up there with Jesus raising Lazarus from the dead, four days after he had apparently shuffled off this mortal coil. The corpse that some said Britain was shackled to now looks very sprightly.

For those who have long memories of relations between Britain and Europe, this is a kind of reverse “Up Yours, Delors!”. Instead of moping around in disappointment at Britain’s decision to leave the EU, the European economy has been on a victory roll.

It reminds me of nothing more than the French taunters in Monty Python and the Holy Grail, who told the English knights of King Arthur that they could go and boil their bottoms and promised to spit, or something like that, in their general direction.

France is on a political roll. It has Emmanuel Macron, and his world view, who always rises to the occasion in speeches and interviews. We have Boris Johnson.

The figures tell the story. Last year, according to new figures from Eurostat, the eurozone and wider EU economies grew by 2.5%, the best for 10 years. In the final quarter, eurozone gross domestic product (GDP) was up by 2.7% on a year earlier, almost double Britain’s 1.5%.

Not so many years ago, the eurozone ‘s difficulties seemed likely to condemn the region to permanent stagnation, a drunken lurch from crisis to crisis. Now growth has returned, even to the worst of the crisis-==hit countries, including Greece. The days when Britain;s growth rate comfortably exceeded that in the eurozone are fading in the memory.

Mario Draghi, criticised for his quantitative easing (QE) programme, particularly in Germany, has one from zero to hero. That QE programme should come to an end soon.

In that final quarter of last year there were strong growth performances from Spain and the Netherlands, both 3.1%, but also from Germany, 2.9%, and even Italy, 1.6%.

Britain is not shackled to an EU corpse but it is still part of the EU, and benefiting from its recovery. Without it, indeed, growth in Britain over the past year or so would have been significantly weaker. Some of the numbers for British exports to EU member states in the year to the fourth quarter are striking: France up 24.6%, the Netherlands 15.2%, Ireland 8.5%, Germany 7.7% and Sweden 7.6%. Outside the EU, exports to China grew by an excellent 24.1% from a low base (and remain below British exports to Ireland), but exports to America fell by nearly 5%.

There is no sign yet that the return of EU and eurozone growth is a flash in the pan. The latest purchasing managers’ index for the eurozone, produced by IHS Markit, showed growth at a near 12-year high, and well spread across countries and sectors.

Noting that the latest reading was the strongest since June 2006, Chris Williamson, chief economist at IHS Markit, said: “The strong upturn is also broad-based, which adds to the potential for the growth to become more self sustaining as demand rises across the single currency area, feeding through to higher job creation as spare capacity is increasingly eroded. The survey data are therefore indicating that the eurozone has started 2018 with very good growth momentum.”

There is much that is good about the European economy. Last year the eurozone ran an €238bn (£210bn) trade surplus with the rest of the world. Much, though not all, was due to Germany, and a considerable chunk of that surplus was with Britain.

Eurozone economies have higher productivity than Britain, in some cases embarrassingly higher. Germany sets the standard. It has much higher productivity as well as a lower unemployment rate; 3.6% against Britain’s 4.3%.

Mostly, however, higher productivity in Europe is against a backdrop of higher unemployment. Average eurozone unemployment is 8.7%, and France has a 9.2% rate. Average eurozone youth unemployment is 18.2%, compared with around 12% in Britain.

Europe is not, either, yet out of the political woods. The consensus is that the upcoming Italian elections will not upset the applecart, but they could. The consensus too is that the membership of the SPD will not scupper Angela Merkel’s long and painful quest for a coalition government but it could.

The bigger question for the EU is whether it can seize the opportunity provided by the revival in growth and falling unemployment to put in place meaningful reforms.

Those reforms fall into two categories. The first are to correct the structural weaknesses in the eurozone itself. The second are to make EU economies, and in particular EU labour markets, more flexible.

On the first, I have written on many occasions during the near two decades of the euro’s existence of its basic design flaws. The single currency is lopsided. There is no fiscal counterpart, a central Treasury, to the European Central Bank. There is insufficient wage flexibility and, while you would not believe it from the debate in Britain, not enough labour mobility. The eurozone is a long way from what economists would call an optimal currency area.

Macron has pushed for a separate eurozone budget and finance minister to address one of the euro’s structural shortcomings. He has received some support from Merkel, but strong opposition from elsewhere in Germany to what would be seen as a permanent transfer union for transferring German taxpayers’ money to other countries. The rest of the EU, it should be said, has been pretty lukewarm.

As for labour market reforms, Draghi summed up he dilemma in a speech a few weeks ago. While there was a window of opportunity, the risk was that without a big investment in education and training, reforms would be “seen as a catalyst for a low-wage precarious economy.”

Macron, again, has gone further than most, pushing through the first phase of his labour market reforms last autumn. But while these provoked a backlash, including one description of them as a “neoliberal Blitzkrieg”, French employers are finding that they are not providing the free-for-all feared by the unions. The EU’s core economies, its original members, France, Germany, Italy, the Netherlands, Belgium and Luxembourg, have the tightest labour market regulations in Europe.

Is the eurozone seizing the opportunity provided by the return to growth? Not yet, or not enough. The first post-crisis opportunity to push through reforms was in 2010 and 2011 and was wasted. The second one is now. The eurozone has enough momentum to keep growth going for some time yet. But it needs to grasp the nettle of reform to secure permanently stronger growth.