Time for the Eurocopter

Compared to the excitement in July, public attention towards the Eurozone has calmed down. This may change a bit comes October when the outcome of the Greek elections will be known – it seems to be fair to assume that we will see a coalition government that will be eager to implement the Third Bailout program. It is also fair to assume that Greece will get a further softening for its huge public debt in form of a extension of the amortization period. All good then?

When one looks at the Eurozone as such, things actually only can be assessed as ‘good’ if the benchmark is ‘no open financial crisis’. Across the Eurozone, risk premium went down, and refinancing of public debt has become a lighter burden then before. If one looks at the usual economic indictors like real growth of GDP, output per hour, unit wage costs, and inflation, then the picture is best described as mixed. The most recent forecast for the Eurozone suggests positive and increasing growth for this year and also for 2016. Even better, bail out-economies like Spain, Portugal, Cyprus and Ireland are supposed to experience growth spurts.



This good news should not be interpreted as proof that (i) internal devaluation eventually worked and/or that (ii) the Eurozone is returning on a sustainable growth path. There is no doubt that the Eurozone enjoyed quite some tailwinds in the last few months. There is the significant reduction in global energy prices that helped to take off some cost pressure. Then the depreciation of the Euro – this set off some of the positive effects of decreasing energy costs but still helped the price competitiveness of the Eurozone. And then the effect of the Asset Purchase program (APP) of the ECB that slowly helped to decrease sovereign debt spreads.

It needs a second look, though, to see behind the good growth projections. It should be recalled that neither Ireland nor Spain were at the mercy of full-fledged rescue programs by the Troika. Rescue funding went more or less directly into the coffers if the ailing banking industries, and no detailed austerity program was attached. This helped to navigate fiscal policy onto a lower path without the severe austerity that was asked by Greece. In the case of Ireland, the recovery could build on a still strong export sector that continued to be part of a global value chain.

The reduction of unit wage costs in quite a number of economies has improved price competitiveness. It would be a too fast of an conclusion, though, that the overall improvement of trade balances would be the result of this improvement. In most cases the turn towards a trade surplus is mainly the outcome of depressed import demand, and to a much lesser degree the result of increased exports, even though it needs to be underlined that exports increased across the board. Unemployment still is very high, and adds to the fragile social situation. Inflation is still extremely low, and in particular far below the ‘inflation target’ of the ECB, despite is move towards a more aggressive  policy of quantitative easing.  Latter may soon come under more pressure when the federal reserve eventually may move towards a rise of its key rate. One way to increase the effectiveness of its quantitative easing policy would be to start the Eurocopter, i.e. a policy where the ECB no longer buys bonds but rather sends out cheques directly to the private households of the citizens of the Eurozone. It could her expected that consumers would use the bulk of the gift for spending, thus increasing effective demand and triggering a classical multiplier that eventually has the potential to lift Eurozone economies onto a higher growth plateau.