The eurozone economy needs a kick-start by Christian Odendahl & Simon Tilford
With Greek banks raising €8.5 billion worth of equity from investors, Italian government bond yields touching all-time lows, and the German economy growing at an annualised 3.3 per cent in the first quarter of 2014, the eurozone appears to have finally overcome the crisis. Despite such positive news, there is ample reason for caution about the outlook for the currency union. Unless eurozone policy-makers do more to bolster demand and target structural reforms on product as well as labour markets, optimism is likely to prove short-lived. Eurozone optimists usually base their case on a subset of the following seven arguments. First, the world economy is bound to grow faster: the IMF estimates that world growth will be 3.6 per cent in 2014, up from 3 per cent in 2013. This should raise demand for European exporters. Second, confidence is returning to businesses and consumers in Europe. According to survey evidence both are above their long-term averages, with consumer confidence back at 2006 levels.
World Bank’s Ease of Doing Business Index, and labour markets have become more flexible, according to the OECD. Fifth, after years of low investment and consumption, consumer goods (for example, cars and fridges) and machinery equipment need replacing. This pent-up demand will give impetus to the eurozone economy.
Third, prices and wages in southern economies have fallen relative to those in the eurozone ‘core’, compensating for some of the exuberance before the crisis and slowly making firms and workers competitive on European and world markets.
Sixth, the largest economy, Germany, is on course to grow robustly. With record employment, relatively low debt levels and long anticipated increases in real wages, domestic demand will help to rebalance the eurozone economy, and push up German prices and wages compared to those in periphery countries.
Fourth, reforms to the structure and institutions of some eurozone economies will have a positive impact on economic growth. For example, most countries have improved their rankings in the
Finally, the eurozone financial sector is being repaired. The ECB is currently inspecting the banks’ balance sheets, forcing them to realise losses and raise capital. This will make room for new loans