Market Analysis

North and South

The eurozone avoided recession (by one traditional definition) in Q1, giving leaders plenty to ponder as they weigh a new EU growth pact.

Surprising many, preliminary official data show eurozone GDP was flat in Q1. The figure’s subject to revision, but for now it seems the region has avoided recession (by one traditional definition).

Digging deeper, growth in core Europe perfectly offset continued contraction in the periphery. Germany, the region’s biggest economy, grew a comparatively robust +0.5% quarter over quarter—a big turnaround from Q4 2011’s -0.2% q/q and well ahead of consensus expectations. Most Baltic and Northern states grew as well, lest anyone think Germany alone pulled the region through. And France held up rather well, with a flat quarter—slower than Q4’s +0.1% advance, but where some see a stall, we see an economy remaining largely resilient in the face of its neighbors’ weaknesses.

Among those weaker neighbors, results varied. Greece fell -6.2% year over year (Eurostat doesn’t report q/q Greek data), though that’s a modest improvement over Q4’s -7.5% y/y. Italy (-0.8%) remained in recession, and Spain (-0.3%) fell into one. But Portugal, which many thought the next domino to fall after Q4’s -1.3% q/q contraction, shrank just -0.1%. While this may not mean Portugal’s recession is nearing an end, it does suggest the deleterious impact of two years of austerity may be starting to wane a bit.

Which is something EU leaders should consider as they prepare for a May 23 summit on a new “growth pact.” A growing chorus is calling for public investment and infrastructure spending to offset the painful effects of austerity, funded by the European Commission (pooled member-state contributions) or Eurobonds (pooled sovereign debt). Either is essentially a fiscal transfer from stronger nations to weaker ones, and Germany’s strength may thus heighten the clamor. However, that strategy likely does nothing to fix the competitive imbalances highlighted by GDP data.

On balance, core European nations’ economies tend to be freer and their labor markets more liberalized. Thus, firms there have fewer barriers to productivity and more globally competitive exports—large reasons why these nations have held up ok so far. Peripheral nations, by contrast, have historically been much less competitive, which is largely responsible for their present predicament. High debt and shrinking economies are symptoms of this underlying problem. All have made substantial reforms to improve competitiveness, but these take time (and ongoing political will) to work.

What the region really needs, therefore, is time. As these changes work their way through the system, and productivity improves while the immediate impacts of spending and public-sector cuts fade, the periphery can likely resume growing. While better-than-expected Q1 GDP growth doesn’t mean the region’s out of the woods, perhaps it buys a bit more time for these reforms to begin working as intended.


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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.