Eurostat's data show that, according to first estimates, the eurozone and the European Union posted seasonally adjusted gross domestic product growth of 0.3 percent in the second quarter of 2013 compared to the previous quarter. This is the first positive growth data for the eurozone since the third quarter of 2011, but financial markets were little moved. The economies of four eurozone countries (Cyprus, the Netherlands, Italy and Spain) and two non-eurozone countries (Bulgaria and Sweden) contracted during the second quarter.
The German economy grew by 0.7 percent, the highest rate seen in more than a year, driven mainly by strong domestic consumption. France also exited the recession, posting 0.5 percent growth in the second quarter — the highest rate since French President Francois Hollande assumed power.
This positive data will likely help German Chancellor Angela Merkel maintain her high approval ratings before Germany's parliamentary elections on Sept. 22. Merkel's government has been preparing the electorate for a year of sluggish growth (the Ministry of Economics estimates the German economy will grow at 0.5 percent in 2013, compared to 0.7 percent in 2012) to keep expectations low. In France, Hollande will be able to highlight that his economic policies are working at a time when popular support for the government is very low and Paris is working on additional economic reforms, particularly in the pensions system. The fact that Germany and France did not drift apart in terms of growth also temporarily hides the underlying pressures in the two countries' relationship caused by diverging economic performance. The Franco-German alliance is the main pillar of the European Union project, and the crisis is currently threatening the stability of that alliance. The relatively strong quarterly growth in France and Germany offers only a small hope that the core economies will be able to revive European consumption and reduce unemployment in peripheral countries.
The new report does not suggest a long-term trend for better growth prospects and does not speak for the entirety of Europe. This is an initial estimate, and seven EU countries (among them, the struggling eurozone countries Ireland and Greece) did not provide data. In fact, compared to the second quarter of 2012, the eurozone and European Union contracted by 0.7 and 0.2 percent, respectively. The so-called flash estimate that Eurostat published Aug. 14 relies on data provided by national statistical offices, which collect data differently and rely heavily on surveys in their initial growth estimates. These estimates are typically revised numerous times. The German statistical office notes that revisions can be made until four years after the initial estimate as additional data are taken into account. Therefore, considering the statistical flaws, it really cannot be said with any certainty whether the situation in Europe has improved or deteriorated over the past quarter.
In France, the statistical office noted that while domestic consumption drove growth, investment and employment during the last quarter dropped (except in the agricultural sector). In June, it forecast a contraction of 0.1 percent for all of 2013, compared to 2012. In Germany, the modest growth reported is largely attributed to the German economy catching up after particularly bad weather during the first quarter slowed economic development, and the second half of the year is expected to produce lower growth.
Moreover, in its spring economic forecast, the EU Commission revised down its growth projections for the eurozone, suggesting a 0.4 percent contraction from its previous forecast of 0.3 percent contraction. Most countries in the eurozone periphery expect to see contractions this year and very weak growth or even additional contractions during 2014. While countries such as Spain and Portugal have seen some improvement in their exports, it will take more than a decade for them to return to pre-crisis levels of unemployment. As a result, popular distrust of political elites will remain high, and the rise of anti-EU sentiments will remain a concrete political threat in the foreseeable future.
Deep-Seated Structural Issues
Since late 2012, the promise of the European Central Bank intervening in debt markets helped stabilize the position of peripheral countries, taking borrowing costs down and making the financial aspects of the crisis less pressing. While policymakers and the European Central Bank have developed tools to stabilize Europe's financial system and deal with the troubled finances of governments, they have not found a way to deal with the weakening European consumer base.
Moreover, the lack of credit for small- and medium-size companies remains a critical problem in Europe. Before the crisis, credit expansion in peripheral countries fueled demand and growth not only in peripheral markets but also in export-oriented economies, such as Germany. This flow of credit has ground to a halt, initially because it was seen as the cause of the crisis, but as the crisis deepened banks also began to regard lending as too great a risk in light of growing unemployment and the inability of consumers and companies to honor their loans. The borrowing costs for companies across the eurozone converged before the crisis, but since 2008 this has been reversed, particularly in the case of smaller loans, which are vital to the small- and medium-size companies that make up the backbone of European economies — especially in the south. Small- and medium-size companies in Greece and Spain pay considerably higher interest rates than their counterparts in Germany or Austria.
Banks have stopped lending not only to consumers but also to each other. According to data from the European Central Bank analyzed by Reuters, the share of cross-border interbank lending in the eurozone dropped from 34 percent in early 2008 to 22 percent in April 2013. Because bank lending is vital for the real economy, the fragmentation of Europe's financial markets also makes it more difficult for the European Central Bank to reach struggling countries with its lax monetary policy. Efforts to reinforce financial integration (for example, by establishing the European banking union) are advancing slowly because some countries, especially northern states such as Germany, fear being further exposed to the economic weaknesses of peripheral countries.
High unemployment and weak government finances mean southern peripheral economies can do little to consume their way out of the crisis. Due to structural damage done through the long period of downturn, southern economies would struggle to even absorb stimulus since it would take time to rebuild productive capacity. Northern economies can do little to fuel consumption across Europe for a number of reasons. Germany has shown resilience to the crisis, partially because of very low unemployment and increasing consumer confidence, but fueling growth through heavy investment abroad would run counter to Germany's calls to rein in government expenditures and could put German taxpayer money — as well as the German industrial base — at risk.
In France, growth has long been driven by domestic demand, but this has also resulted in a continuous rise of government expenditures and loss of competitiveness (highlighted by the increase of France's trade deficit, from a 1.5 percent of gross domestic product surplus in 2002 to a 2.2 percent of gross domestic product deficit a decade later), two issues France is trying to correct. The Nordic EU countries and the Netherlands are already facing a slowdown in their domestic economies. The Netherlands, after contracting by 0.2 percent in the last quarter, has now been in recession for a year and unemployment is at 8.5 percent, the highest it has been in more than 15 years, according to the Dutch statistics office.
One of the principles of the European Union is the promise that closer integration will generate prosperity for everyone. It is too early to say that the estimates for the past quarter indicate more fundamental growth taking place in line with the EU promise. For the past few years, northern economies have provided aid to struggling peripheral countries in return for structural adjustments and austerity. As the crisis spreads north, voters will increasingly question the benefits of this solidarity. Coupled with continued stagnation and high unemployment in the south, this foundational belief of prosperity through integration will be questioned throughout the entire Continent.
