RECOVERY STALLS IN EUROPE AS AUTERITY GRINDS ON / THE TELEGRAPH

Recovery stalls in Europe as austerity grinds on

ECB needs to launch "shock and awe QE" to arrest slump in eurozone, says think tank

By Ambrose Evans-Pritchard

9:12PM BST 15 May 2014
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France slipped back to zero growth and seems caught in a vicious circle Photo: PA

Growth wilted across large swathes of the eurozone in the first quarter, dashing hopes of durable recovery and prompting demands for shock and awe action from the European Central Bank.

Finland fell into recession, while output contracted by 1.4pc in Holland, 0.7pc in Portugal and 0.1pc in Italy. “The recovery has vanished,” said Italian think tank Nomisma.

Bourses tumbled across Europe, with Milan’s MIB index down 3.6pc, led by a plunge in bank stocks. Madrid’s IBEX was off 2.35pc and France’s CAC fell 1.25pc, as investor dumped shares to buy bonds.

France slipped back to zero growth and seems caught in a vicious circle as it keeps cutting spending further to meet its EU deficit targets. The country’s hardline premier, Manuel Valls, has vowed to push through €50bn (£40bn) of spending cuts, with fiscal tightening of 0.8pc of GDP this year.

The country’s Observatoire Economique said the outlook was even more troubling than it looked. “France has seen a complete stagnation for the last 10 years, an unprecedented situation since the end of the Second World War,” it said. The body said fiscal cuts of 5pc of GDP from 2010 to 2013 had been premature and self-defeating.

Prof Charles Wyplosz, from Geneva University, said the relapse should not be a surprise. “Austerity has been reduced but it has not stopped. Countries are still being told to reduce their deficits and they should not be doing that right now,” he said.

The ECB has yet to offer stimulus to cushion the effects or to offset “passive tightening” from a strong euro and falling credit. Eurozone inflation was 0.7pc in April, with a bloc of countries already in outright deflation.

Michel Martinez, from Societe Generale, said the latest grim figures cried out for action, predicting a cut in interest rates to 0.05pc and a negative deposit rate of 0.1pc. He expects the ECB to buy €100bn of asset-backed securities later this year, with full-blown quantitative easing of up to €1.5 trillion in reserve if the recovery dries up altogether.

While the eurozone as a whole eked out growth of 0.2pc, this was largely due to Germany, where output surged by 0.8pc. The country is in a unique position, trading heavily with East Asia and benefiting from a chronically undervalued exchange rate within the EMU structure.

Spain racked up growth of 0.4pc, but this was due to a compression of imports and use of a “GDP deflator” of -0.4pc. Spanish exports fell 0.6pc. “This was a statistical mirage,” said Simon Tilford, from the Centre for European Reform.

“We are not seeing real recovery anywhere apart from Germany, and the picture becomes more troubling the more you drill into it. Nominal GDP growth is very weak, so we’re going to see a significant rise in debt rations,” he said. “We think it is highly unlikely that the ECB will launch the kind of shock and awe QE needed to convince the markets that they are really going to stay the distance,” he said.

The slump in Dutch output is a nasty shock for the government, which declared victory too soon after a deep double-dip recession.
While a fall in gas output due to the warm winter may have distorted the figures, the economy remains close to a debt-deflation trap.
Bruno de Haas, a former official at the Dutch central bank and author of Why The Euro Will Break Us, said membership of EMU had a disastrous effect on the country’s credit structure and was now blocking recovery.

“The sooner the Netherlands returns to the guilder, the better,” he said. Dutch property prices have fallen by 20pc, leaving a quarter of mortgages in negative equity. As the slump drags on, it makes it even harder for Dutch households to cope with loans near 250pc of disposable income.

Dario Perkins, from Lombard Street Research, said the Netherlands faced a 70pc risk of deflation under the International Monetary Fund’s deflation risk model, which uses a complex mix of ingredients, including credit contraction, that goes beyond the headline price level.

Perhaps the most worrying data are in Portugal, where exports have fizzled and deflation is gaining a foothold.

This is an ominous development for a country with a public and private debt nearing 400pc of GDP by some estimates.