Eurozone Economy Grows, but Total Output Still Lags 2008

http://www.nytimes.com/2016/02/13/business/international/eurozone-economy-growth.html

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Europe is still trying to crawl back to where it was in 2008.

That was the subtext of the economic data for the eurozone published on Friday.

The 19-country eurozone, the core of Europe’s economy, grew at an annual rate of 1.1 percent in the last quarter of 2015. But total economic output remained just slightly lower than when the global economic crisis began, in 2008.

Since then, much of the rest of the world, including the United States, has bounced back, however fitfully. But the eurozone as a bloc has been weighed down by huge numbers of problem loans held by its banks, a shortage of credit and a reluctance of governments to make politically unpopular economic changes. More recently, an influx of immigrants has heightened political tensions and further shaken the eurozone’s unity.

And yet many of the eurozone’s problems are a result of policy missteps — or policies that simply could not be executed because of the fragmented nature of a loose affiliation of 19 countries that share a currency but each have their own taxing and spending regimes.

After the financial crisis, the centralized United States economy took only until the third quarter of 2011 to surpass its previous peak at the end of 2007. That was largely because the federal government quickly stepped in to clean up the commercial banks. And the central bank — the Federal Reserve — kept interest rates low and embarked on an unprecedented program of huge stimulus spending to revive the American economy.

Many eurozone governments, however, responded to the crisis by cutting spending, engaging in austerity economics that thwarted growth.

Along the way, the European Central Bank, under its previous president, actually raised interest rates before reversing course. Even under its current president, Mario Draghi, who came to power in late 2011, the central bank was unable to mount a stimulus program comparable to the Fed’s until March of last year — as the members of the bank’s Governing Council, coming from various eurozone countries, argued over when or whether to take action.

All of this has added up to growth so feeble that the eurozone economy is still not as big as it was five and a half years ago. And unemployment is a stubbornly high 10.4 percent — more than twice the jobless rate of the United States.

Europe’s failure to climb back provides one more reason to be nervous about the global economy. The eurozone is still not strong enough to compensate for problems elsewhere, like in China, where there is the risk of a slowdown. The longer it takes for Europe — the United States’ largest trading partner — to make up lost ground, the greater the risk the region will be trapped in the same kind of long-term stagnation that afflicts Japan.

Adjusting for inflation, the countries sharing the euro currency produced goods and services valued at 2.465 trillion euros, or $2.788 trillion, in the last three months of 2015. That brought the eurozone close to — but still short of — the €2.471 trillion that it produced in the first quarter of 2008.

The eurozone could, finally, hit a new high during the first quarter of 2016 if it manages another quarter of growth as strong as the last quarter of 2015. But that is by no means a certainty.

Some unsettling recent trends raise the risk that the eurozone could even slip back to recession. Wild swings in the share prices of Deutsche Bank and other large European lenders have raised fears of another banking crisis. Voters in some countries, like Portugal, have rebelled against economic overhauls that are intended to allow faster growth but that often mean less job security in the short term.

Even if the eurozone does recover its previous economic strength soon, the wealth will not be divided equally. A closer look at the numbers released on Friday by Eurostat, the European Union’s statistics agency, shows that the eurozone is divided into two kinds of countries.

There are those that have recovered the lost economic ground, like Germany and Denmark.

And there are those that have not recovered and are not likely to soon, like Spain, Italy and — above all — Greece. All three of these countries are substantially poorer than they were in 2008. Greece’s economy is only three-quarters the size it was then.

Spain has recently become the fastest-growing large country in the eurozone as it has bounced back from a banking crisis caused by a housing bubble.

But Spain still has a lot of catching up to do. Spanish unemployment is still almost 21 percent, and overall economic output remains well below what it was in 2008.

Pilar Cabañeros, 44, who comes from Barcelona, said she is feeling better about her own situation because she now lives in Britain, which is not in the eurozone and where the economy is doing fairly well.

But in Spain, which she visits often, “I don’t think people are positive about the economy,” Ms. Cabañeros said. “Definitely not.”

The diverging fortunes of the eurozone countries have political consequences.

The northern countries like Germany preach debt reduction, while the southern countries like Italy plead for more spending on public works to create jobs. The two groups have also differed on measures to prevent future crises. For example, Germany has objected to plans to create a eurozone fund that would protect depositors in the event of a banking crisis. The conflicts have threatened the unity of the eurozone.

“When economic forces diverge in what is supposed to be a common enterprise, that creates political unrest,” said Thomas F. Cooley, a professor at the Stern School of Business at New York University.

Mr. Cooley, who tracks eurozone growth on a blog he maintains with Peter Rupert, an economist at the University of California, Santa Barbara, said the explanation for the eurozone’s slow growth was fairly simple.

Fearing a political backlash, governments have been reluctant to take steps that may cause short-term pain while helping long-term growth, like loosening rules that make it difficult for companies to hire and fire.

The countries that have made changes tend to be the ones whose economies have performed the best. They include Germany, where unemployment has fallen throughout the crisis and is now at 4.5 percent. Britain, which uses the pound currency and has tried to keep its economy somewhat buffered from the eurozone’s, also has a relatively low jobless rate, 5.1 percent, which is comparable to the unemployment rate in the United States.

France has recovered the ground it lost since 2008 but just barely. The Socialist French government has been reluctant to take on labor unions and make changes to work rules that critics say hobble entrepreneurship.

There are some positive signs in Europe. On much of the Continent, credit is cheap because of stimulus measures taken by the European Central Bank. Low fuel prices have left people with extra money they can spend on other goods and services.

One of the biggest bright spots is consumer spending, which has rebounded and helped make eurozone growth better than it would otherwise be.

“The interest rates on my loans have gone down, the purchasing power has gone up, there is confidence again,” said Jocelyn Assor, 36, who was helping to raise funds for a French H.I.V. advocacy group outside the Les Halles shopping mall in central Paris.

Experts used to argue whether the eurozone would suffer a lost decade like Japan. There are some similarities. For example, Europe and Japan both have aging populations, with more people depending on pensions and fewer young people in the work force. Both were slow to clean up their banks.

Europe’s demographic problems are not as severe as Japan’s, Mr. Cooley of New York University pointed out. But, he asked: “Is this Europe’s lost decade? They’re struggling with a lot of the same things.”