Review & Outlook
Two-Track Europe
Reforming countries are growing, while most of the rest are not.
Photo: Getty Images Economic growth in the eurozone slowed to 0.3% in the second quarter from 0.4% in the previous quarter, according to data released Friday. After a few months of optimism fueled by a depreciating currency, this is the latest warning that most of Europe is returning to its familiar anemic state.
The positive spin is that things could have been worse. Europe has muddled through a seven-month Greek crisis without falling into recession. Credit for this generally goes to European Central Bank President Mario Draghi, whose ultralow interest rates and program to purchase €60 billion ($66.56 billion) of sovereign bonds every month have ostensibly bolstered the bloc’s resilience. That’s damning Europe’s economies with faint praise if monetary heroics are required merely to stagnate.
The bigger story is the slow growth beyond Greece. The most worrying news comes from Germany, whose exporters were supposed to be the biggest beneficiaries of the cheap euro Mr. Draghi has engineered. German growth in the second quarter edged up a tenth of a percentage point, to 0.4%, largely thanks to net exports. But growth at this stage of the post-2012 recovery is lagging the rebounds from recessions in 1996 and 2009, Capital Economics notes. Net exports aren’t driving the rapid recovery many had hoped for when the euro devaluation got underway.
German industrial production has been sluggish, having increased 0.1% in the second quarter compared to 0.5% in the first. The main German bright spot continues to be lower global oil prices, which offset the inflationary effects of having to pay more euros for imports and allow German households to continue shopping. In any case it’s becoming clear that a German export-led boom isn’t going to revive the rest of the eurozone.
The latest data also show that other large eurozone economies aren’t reviving themselves. After a 0.7% quarterly growth surprise three months ago, France notched a big, fat zero in the latest quarter. Italy managed only 0.2% growth. In both places the picture is similar to Germany, only worse, with lagging business optimism and industrial production.
Europe’s politicians, as ever, will blame outside forces. China’s slowdown is hurting exports, and it would help if the U.S. were growing faster than 2%. But too many European leaders have squandered the opportunity from low interest rates and rising optimism to press ahead with pro-growth economic reforms. Even those who understand the need, such as French Prime Minister Manuel Valls, are struggling against political systems resistant to even modest reforms.
What’s coming into focus is the extent to which Europe is developing a two-track economy. The brightest spots in last week’s data release were Spain, which accelerated to 1% growth in the second quarter, the U.K. (0.7%), and Eastern European economies such as Poland (0.9%) and Latvia (1.2%), some of which aren’t euro members but all of which have undertaken pro-market reforms.
These countries are evidence that European economies can grow when they create the conditions that encourage investment and business creation. The question now is whether the political class and voters in lagging Europe will get the message or be content with little or no economic growth.
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