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Are the weakest European Economies Recovering?

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Europe’s economy is growing at a higher pace than the US. Ηow are the weak economies of the region doing this development and what problems they face.

The European economy is shows signs of recovery that few could have predict during the financial crisis of 2007-2008 and the Euro zone crisis of 2010. Ten years after the crisis the 19 member’s block of the euro zone is growing faster than the United States with an annual growth at 2.3% compare with the 2.2% of the USA. Unemployment has fall at 9.1% the lowest level since 2009 and the industrial production increased by 3.2%. The recovery of the European economy is due to a series of reforms in the economy and finance. James Nixon, chief European economist at consultancy Oxford Economics comments that: “The euro area has done a lot of work over the last decade to get its house in order and also a lot structural reform. That has been an extraordinary, excruciatingly slow process but it is starting to bear fruit.” The good performance of the European Economy has led the president of the European commission Mr. Jan Claude Junker to declare that: “wind is back in Europe’s sails” in his annual speech in the European parliament in Strasbourg.

Although the overall performance of the European economy is satisfactory there are reasons for concern. France is expanding at an annualized rate of 1.7%, fuelled by confidence in French president Emmanuel Macron and his reform agenda, but is lower than euro zone average. Germany’s economy remains solid, but Germans are increasingly worried about inequality and low-wage jobs. As Miss Cinzia Alcidi, head of economic policy at the Centre for European Policy Studies comment:  “The outlook for the euro area has improved a lot but we are still closer to 2% than 3% [economic growth] so the effect [on unemployment] will be milder and will take more time.”

In this economic environment how the economies that were affected the most by the crisis is performing?

Portugal, is recovering by the experience of a 78bn euro’s bailout in 2011 and an austerity policy with decline in public investments, wages and welfare, which was implemented by the EU and the IMF. Portugal’s economy is on the brink of the fastest economic expansion for two decades and the central left Prime Minister Mr. António Costa believe that the economic success came after relinquishing the austerity policies imposed by the EU and International Monetary Fund between 2011 and 2014. Public wages and pensions have restored to the pre-crisis levels but Portugal’s government and private debt could be the cause of conflict with the EU. The government debt of Portugal is at 130.4% of GDP and the private debt is at 81.2% of GDP.

Ireland was the model for the economies of the European periphery after the financial crisis of 2007-2008 and the introduction of austerity policies and bail outs for the members that were in severe financial situation. In 2015 the Irish economy had an astonishing 26% growth, giving the impression that the recovery have achieved despite the recent Brexit referendum. But the recovery of the Irish economy is based on multinationals corporations that have transferred their intellectual property in Ireland with the purpose to protect their profits. The growth achieved in 2015 has therefore characterized as “leprechaun economics” and their impact in the real economy is minimal. Ireland is faced with two major obstacles in order to achieve a substantial recovery; one is the dependency of its economy on few multinationals corporations and seconds the private debt of the country which for the non-financial sector is at 240% of GDP. The private debt is an obstacle for the investments by the private sector and has a negative impact on the consumption. These two factors are a serious threat for the Irish economy that could lead it to another crisis.

Italy, the economy of Italy is benefit by the general growth of the Euro zone, unemployment start to decline and factories (particularly in the industrial North) are increasing their production due to the higher demand. Meanwhile, the bailout of Italy’s oldest bank and the rescue of two lenders have boosted confidence. Although this development is satisfactory the major problem for the Italian economy remains its fragile banking sector. What cause worries about the Italian banking system is the amount of bad debts: the total of non-performing loans amounts to €174bn (£153bn), according to Bloomberg. Another issue that is vital for Italy’s economy ( Italy has elections in 2018) is if the political system will have consensus to undertake long-sought reforms, such as improving productivity, reducing debts and increasing funds for universities.

Spain, in July 2017 the bloc’s fourth-largest economy returned to its pre-crisis size. Unemployment had fall to 17% although is the second larger present after Greece. This is the result of a series of reforms in the labor market that the government of the Prime Minister Manuel Rajoy installs as for example making easier for corporations to fire personnel and makes the labor market more flexible. These measures have also a negative impact in the Spanish society since income inequality has increase. Also another problem that could destabilize the economy of Spain is the recent political upheaval with the referendum for the independence of Catalonia. The recent news from Barcelona and the reaction of the government was a shock for the EU and there are fears that if the tensions increase the economy could be destabilize.

Greece, the Greek economy show signs of growth since unemployment had decline from 27% to 21% and factories are expanding productions. But a closer look reveals the country is scarred by the economic crisis that saw its economy contract by 25%. One fifth of the young population is unemployed and the government’s debt is at 179% of GDP adding a burden for the economy. At the same time the creditor’s demands high budget surpluses, which are deemed unrealistic by many economists. The actual recovery of the the Greek economy is hanging from a thread and the third assessment from the creditors is ahead.

Overall we could argue that the general euphoria from the recovery of the Euro zone economy help the economies of the periphery to recover partially from the economic crisis at least in terms of economic indicators. But there are still serious problems to be dealt with, for example the EU members of the periphery were divided between those that they follow a bailout program implemented by the EU and the IMF and those that the governments have been allowed to pursue austerity policies on their own. Εven countries following a joint program implemented it differently and had different outcomes as  in the case of Portugal and Greece. What is common to all the countries of the region is the rise in income inequality and the widening of the gap between poor and wealthy individuals.  If the difference policies, the social and political unrest don’t be dealt with a common and strategy for all the members States then the recovery of the weakest economies of the European periphery will be face a new more severe crisis than the 2010.

Menelaos Paloumpis

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