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Full Recovery Still Years Away for Many in Euro Zone Full Recovery Still Years Away for Many in Euro Zone
(4 months later)
PARIS — Despite recent optimism that Europe’s economy is finally turning a corner, a stark reality remains: The situation is still fragile. PARIS — Despite recent optimism that Europe’s economy is finally turning a corner, a stark reality remains: The situation is still fragile.
By many accounts, the euro zone has been rebounding from a wrenching double-dip recession that began in 2008 after the fall of Lehman Brothers. Financial markets have been in a celebratory mood, driving down borrowing costs for even the most troubled economies in recent months, while politicians have declared the worst of the crisis is over.By many accounts, the euro zone has been rebounding from a wrenching double-dip recession that began in 2008 after the fall of Lehman Brothers. Financial markets have been in a celebratory mood, driving down borrowing costs for even the most troubled economies in recent months, while politicians have declared the worst of the crisis is over.
But the uneven nature of the recovery — between a group of strong countries in the north and a larger swath of weak nations in the southern rim — has made it difficult for the overall economy to gain momentum.But the uneven nature of the recovery — between a group of strong countries in the north and a larger swath of weak nations in the southern rim — has made it difficult for the overall economy to gain momentum.
Growth in the currency union rose 0.2 percent in the first quarter, which translates to an annual growth rate of 0.8 percent, according to data released on Thursday by Eurostat, Europe’s statistics agency. While it was the fourth straight quarter of expansion, it was half what economists expected.Growth in the currency union rose 0.2 percent in the first quarter, which translates to an annual growth rate of 0.8 percent, according to data released on Thursday by Eurostat, Europe’s statistics agency. While it was the fourth straight quarter of expansion, it was half what economists expected.
The growth is so feeble that it could be years before Europe truly recovers. The overall euro zone economy is still more than 2 percent smaller than it was before the crisis hit. And the pace of recovery, economists say, is even slower than it was after the Great Depression of the 1930s.The growth is so feeble that it could be years before Europe truly recovers. The overall euro zone economy is still more than 2 percent smaller than it was before the crisis hit. And the pace of recovery, economists say, is even slower than it was after the Great Depression of the 1930s.
The differences at the country level are stark. While Germany’s economy is chugging along at a decent clip, expanding by 0.8 percent in the first quarter, France slipped back into stagnation in the quarter. And Italy, Portugal and Greece shrank yet again.The differences at the country level are stark. While Germany’s economy is chugging along at a decent clip, expanding by 0.8 percent in the first quarter, France slipped back into stagnation in the quarter. And Italy, Portugal and Greece shrank yet again.
Of the 18 European Union member countries that use the euro, only Germany and, to a lesser extent, France have returned to precrisis levels of growth. The United States, despite a spotty recovery, hit that marker in 2011.Of the 18 European Union member countries that use the euro, only Germany and, to a lesser extent, France have returned to precrisis levels of growth. The United States, despite a spotty recovery, hit that marker in 2011.
“Unless growth in the euro zone really picks up, then the prospect of a lost decade is very real,” Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington, said ahead of the report. “It matters because it permanently shifts the political power center of the euro toward the stronger countries of Northern Europe, and in the southern countries, it means a decline of living standards that may well last beyond a decade.”“Unless growth in the euro zone really picks up, then the prospect of a lost decade is very real,” Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington, said ahead of the report. “It matters because it permanently shifts the political power center of the euro toward the stronger countries of Northern Europe, and in the southern countries, it means a decline of living standards that may well last beyond a decade.”
The dynamics are putting increased pressure on the European Central Bank to follow through on a pledge to stimulate the economy next month. With the economic picture continuing to look weak, analysts now expect the E.C.B. to cut interest rates close to zero and charge interest to banks that store funds at the central bank.The dynamics are putting increased pressure on the European Central Bank to follow through on a pledge to stimulate the economy next month. With the economic picture continuing to look weak, analysts now expect the E.C.B. to cut interest rates close to zero and charge interest to banks that store funds at the central bank.
Any economic stimulus could not come fast enough for Mina Giannandrea, 68, the owner of clothing stores in the center of Rome that sell expensive Max Mara dresses — luxuries that fewer people can afford.Any economic stimulus could not come fast enough for Mina Giannandrea, 68, the owner of clothing stores in the center of Rome that sell expensive Max Mara dresses — luxuries that fewer people can afford.
As the crisis and government-imposed austerity measures have sapped the Italian economy, Ms. Giannandrea has closed two of her four shops and laid off eight employees since 2012. Many had worked with her for decades but have now joined the growing number of people she knows who are without jobs. Unemployment in Italy, the euro zone’s third-largest economy, has risen to 13 percent, higher than the euro zone’s overall level of about 12 percent.As the crisis and government-imposed austerity measures have sapped the Italian economy, Ms. Giannandrea has closed two of her four shops and laid off eight employees since 2012. Many had worked with her for decades but have now joined the growing number of people she knows who are without jobs. Unemployment in Italy, the euro zone’s third-largest economy, has risen to 13 percent, higher than the euro zone’s overall level of about 12 percent.
“People here need hope,” Ms. Giannandrea said. “How can my business pick up, if half of the families I know are unemployed?”“People here need hope,” Ms. Giannandrea said. “How can my business pick up, if half of the families I know are unemployed?”
Reasons for optimism in the euro zone do exist. Investment and industrial activity have been rebounding since last autumn. Consumer confidence has ticked up of late. Spain, the fourth-largest euro zone economy, has gone from a painful recession to three straight quarters of growth.Reasons for optimism in the euro zone do exist. Investment and industrial activity have been rebounding since last autumn. Consumer confidence has ticked up of late. Spain, the fourth-largest euro zone economy, has gone from a painful recession to three straight quarters of growth.
But other dark clouds are on the horizon. The fallout from the crisis in Ukraine, for example, threatens to spill over into the broader European economy. Already, it is wreaking havoc on Russian growth, which slowed to an annual rate of less than 1 percent in the first quarter.But other dark clouds are on the horizon. The fallout from the crisis in Ukraine, for example, threatens to spill over into the broader European economy. Already, it is wreaking havoc on Russian growth, which slowed to an annual rate of less than 1 percent in the first quarter.
The growth potential of many European economies has also been stifled by the effects of austerity measures imposed in response to high government debt. Greece, for example, has struggled to make up for a near 25 percent economic contraction since 2008, as it pushes spending cuts and tax increases.The growth potential of many European economies has also been stifled by the effects of austerity measures imposed in response to high government debt. Greece, for example, has struggled to make up for a near 25 percent economic contraction since 2008, as it pushes spending cuts and tax increases.
France, which has battled two shallow recessions in two years, slipped back to zero growth in the first quarter from a 0.2 percent increase in the fourth quarter. The Netherlands, also under the grips of an austerity plan, had a drastic contraction in the first quarter, as the economy shrank 1.4 percent from the preceding quarter.France, which has battled two shallow recessions in two years, slipped back to zero growth in the first quarter from a 0.2 percent increase in the fourth quarter. The Netherlands, also under the grips of an austerity plan, had a drastic contraction in the first quarter, as the economy shrank 1.4 percent from the preceding quarter.
In many cases, countries that pledged major policy overhauls for labor markets, spending and taxes during the crisis that were meant to stoke recoveries have yet to see those initiatives bear fruit. The worry now, economists say, is the likelihood that governments will not press ahead with reforms, which could further impede the rebound.In many cases, countries that pledged major policy overhauls for labor markets, spending and taxes during the crisis that were meant to stoke recoveries have yet to see those initiatives bear fruit. The worry now, economists say, is the likelihood that governments will not press ahead with reforms, which could further impede the rebound.
Output in most euro zone countries would have to take big leaps now and in coming years to make up for growth lost during the downturn, economists say.Output in most euro zone countries would have to take big leaps now and in coming years to make up for growth lost during the downturn, economists say.
“The question is, What’s Europe’s future for the 21st century?” said Kenneth Rogoff, a professor of economics at Harvard. “Will they still be able to grow and compete with Asia and more dynamic regions?”“The question is, What’s Europe’s future for the 21st century?” said Kenneth Rogoff, a professor of economics at Harvard. “Will they still be able to grow and compete with Asia and more dynamic regions?”
Nearly six years since the onset of the crisis, Germany is still one of the few euro zone countries to have fully bounced back. Its economy is now around 4 percent bigger than it was in 2008, said Richard Boxshall, an economist at PwC, the consulting firm, in London.Nearly six years since the onset of the crisis, Germany is still one of the few euro zone countries to have fully bounced back. Its economy is now around 4 percent bigger than it was in 2008, said Richard Boxshall, an economist at PwC, the consulting firm, in London.
Industrial powerhouses like Freudenberg Group have driven the nation’s growth. Its 11,000 employees in Germany make fabrics, metal and chemical technologies, machinery seals and a range of other sophisticated products.Industrial powerhouses like Freudenberg Group have driven the nation’s growth. Its 11,000 employees in Germany make fabrics, metal and chemical technologies, machinery seals and a range of other sophisticated products.
On a recent day, workers in one factory hovered near complex machines that rolled out narrow strips of metal, which were separated by a laser and then welded to form metal seals.On a recent day, workers in one factory hovered near complex machines that rolled out narrow strips of metal, which were separated by a laser and then welded to form metal seals.
In 2008, Freudenberg “anticipated an imminent crisis and began to initiate capacity adjustments,” said Mohsen Sohi, a member of the management board. The company, whose sales rose 4.8 percent last year to 6.6 billion euros, or about $9 billion, invested €246 million last year in research and development on new products.In 2008, Freudenberg “anticipated an imminent crisis and began to initiate capacity adjustments,” said Mohsen Sohi, a member of the management board. The company, whose sales rose 4.8 percent last year to 6.6 billion euros, or about $9 billion, invested €246 million last year in research and development on new products.
“We saw the crisis as an opportunity for change, and we were able to use it to lay the foundations for our success today,” Mr. Sohi said.“We saw the crisis as an opportunity for change, and we were able to use it to lay the foundations for our success today,” Mr. Sohi said.
In other countries, though, big challenges remain. Italy’s gross domestic product has shrunk more than 8 percent in six years. The economy would need to grow at least 3.7 percent for each of the next two years — much faster than its current 0.6 percent annual pace — to return to where it was in 2008, according to calculations by PwC.In other countries, though, big challenges remain. Italy’s gross domestic product has shrunk more than 8 percent in six years. The economy would need to grow at least 3.7 percent for each of the next two years — much faster than its current 0.6 percent annual pace — to return to where it was in 2008, according to calculations by PwC.
Ms. Giannandrea, the dress shop owner, doubts that will happen any time soon. When the crisis hit, politicians everywhere, including in Italy, promised structural economic changes to fuel a recovery and help businesses like hers rebound.Ms. Giannandrea, the dress shop owner, doubts that will happen any time soon. When the crisis hit, politicians everywhere, including in Italy, promised structural economic changes to fuel a recovery and help businesses like hers rebound.
Matteo Renzi, the new Italian prime minister, has vowed a fresh approach to reinvigorating the economy and cutting joblessness, including revising the tax system and simplifying corporate regulations. But after six years of similar promises from earlier governments, few changes have materialized.Matteo Renzi, the new Italian prime minister, has vowed a fresh approach to reinvigorating the economy and cutting joblessness, including revising the tax system and simplifying corporate regulations. But after six years of similar promises from earlier governments, few changes have materialized.
Revisions to many rigid Italian labor laws that make it expensive to hire and keep employees remain “a pipe dream,” Ms. Giannandrea said, adding to her costs.Revisions to many rigid Italian labor laws that make it expensive to hire and keep employees remain “a pipe dream,” Ms. Giannandrea said, adding to her costs.
Higher taxes were levied to pay for the Italian government’s huge debts. And consumers have all but stopped spending on the pricey coats and dresses she stocks.Higher taxes were levied to pay for the Italian government’s huge debts. And consumers have all but stopped spending on the pricey coats and dresses she stocks.
Ms. Giannandrea tried to remain positive when she shut her stores. But she struggled to get past feelings of pain, not only for a business that had been part of her life for 40 years but for her country as a whole.Ms. Giannandrea tried to remain positive when she shut her stores. But she struggled to get past feelings of pain, not only for a business that had been part of her life for 40 years but for her country as a whole.
“Will Italy make it?” she asked. “I can’t answer that question.”“Will Italy make it?” she asked. “I can’t answer that question.”