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All not Well in Eurozone

Paper doesn’t refuse ink, so those with the requisite skills are able to take a story and make it sound positive or negative based on their own particular needs. Some would call it spin, others may describe it as blatantly or deliberately misleading to further their own aims, but numbers or statistics are far more difficult to manipulate.

Depending on what and where you read your news, there is quite clearly a battle being waged between pessimism and optimism about whether or not Europe is stuck in a quagmire or marching back to growth and knocking every obstacle out of its way. Both sides have strong and lucid arguments but strangely, whilst one is pessimistic and the other optimistic, they both agree on what needs to be done and where the focus for a recovery is required, be that continued recovery or the start of one: finance and lending.

Optimism in Ireland these days is never in short supply. Property prices are increasing nicely - positively streaking ahead in Dublin - the government is borrowing at lower and lower rates and Fitch have most recently upgraded Irish Debt. All appears well and whilst we are no longer careering towards ‘junk status,' the backdrop in Europe is far from rosy. Being complacent caused many of the problems that we have been facing and being complacent and not cognizant of what is happening in the wider global economies may see us caught unaware once more. While the rest of the world recovers from the Great Recession of 2008-2009, Europe is stagnating.

The numbers don’t lie. This week’s figures for the euro-zone economy were far from healthy, however you try to decipher them.  An already feeble and faltering recovery has stumbled. Output across the euro area was flat in the second quarter, following a poor start to the year when the single-currency club managed to grow by just 0.2%. Yes, there were some more positive results; the Dutch and Portuguese economies, which had contracted in the first quarter, rebounded, growing by 0.5% and 0.6% respectively. Spanish growth picked up from 0.4% in the first quarter to 0.6% in the second. But these performances were overshadowed by the poor figures recorded in the three biggest economies. Italy, the third largest, had already reported a decline of 0.2%, pushing it into a triple-dip recession. France, the second biggest, continued to stagnate. But the real blow came from Germany, the powerhouse of the euro zone, where output slipped by 0.2%.

Should this be cause for concern? Of course, the new GDP numbers are yet more evidence that the euro-zone economy is in a bad way. Consistently low inflation has prompted fears that Europe will soon slide into deflation. Prices are already falling in Spain and three other euro-zone countries. Deflation is a real possibility and would be particularly grave for the euro area because both private and public debt is unrealistically high in many of the countries that share the single currency. Even if inflation is positive but stays low it hurts debtors, as their incomes rise more slowly than they expected when they borrowed. Not dealing with the debt burdens that we built personally, as businesses and as a nation will continue to come back to haunt us.

Access to capital remains an issue for all and lies at the centre of a continued recovery, both in Ireland and in Europe as a whole. Many of us remain concerned that Europe has not moved as fast as the U.S. when it comes to the cleansing of balance sheets of financial institutions. We want banks to bring their balance sheets in order but also lend more money; the contradiction is difficult to ignore.  There is a worldwide backdrop of banks deleveraging but we expect them to write new business. It simply cannot and will not happen.

Banks dominate the provision of credit in the euro area unlike the U.S., where companies raise much of their funding on the bond markets. Concerns remain that not enough is being done to improve lending In Europe. The stress tests are belatedly getting the job done, but they still remain a powerful brake on lending until they are properly completed. There will be no safe recovery until this is addressed.

So whether your glass is half full or half empty based on what you see in Ireland, a lot of what happens in the future will be heavily influenced by what is happening in the rest of Europe. The numbers do not lie, it’s not as good as it may first seem.

Darwin AllenComment