The Euro Zone Remains Mired in Recession

The euro zone remains mired in recession despite greatly improved financial conditions over the past nine months due to the European Central Bank’s efforts to save the currency. Output declined by 0.2% in the first three months of 2013 from its level late last year, the sixth consecutive quarter of a recession that started in late 2011. GDP rose by just 0.1% in Germany, the biggest economy in the euro zone and declined by 0.2% in France, the second biggest. Falls in southern Europe were much bigger, with GDP declining by 0.5% in Italy and Spain and 1.3% in Cyprus.

Forecasts from the European Commission in early May showed annual euro-zone GDP shrinking by 0.4% in 2013, following a contraction of 0.6% in 2012. The economic reverse will be much deeper on the periphery of the euro zone than in its core. Cyprus is the worst performer this year as its GDP shrinks by 8.7%. Conversely, Estonia’s GDP will rise by 3% in 2013. Within the 27-nation European Union (EU), Latvia’s GDP will increase by 3.8%, and is expected to join the euro zone next January.

The disparity between core and periphery is particularly stark in labor markets. Unemployment in Germany was just 5.4% of the workforce in March 2013, whereas in Greece and Spain it was around 27%. The gap is even bigger for young people. In Germany the youth jobless rate was 7.6% in March whereas it was 56% in Spain and reached 64% in Greece in February. These figures overstate the blight of youth unemployment because many young people are in full-time education and do not count as part of the labor force. 

Even so there has been more rebalancing in the periphery than is sometimes appreciated. Current-account deficits which had ballooned in the first decade of the euro have narrowed. Portugal’s deficit has shrunk from 12.6% of GDP in 2008 to 1.5% in 2012; over the same period Greece’s has fallen from 15% to 3%. Primary budget balances are also on the mend. Greece’s is expected to reach zero in 2013 from its deficit of 10.5% of GDP in 2009. The highest primary deficit in the EU this year will be run by Britain, 3.9% of GDP.

Despite these improvements, government debt levels are worryingly high in the periphery. Despite a bond buyback late last year and the write-down of over half of privately held debt in March 2012, Greek debt will reach 175% of GDP by the end of this year. Although Greece is being helped by interest deferral and maturity extension along with very low interest rates, it needs a further restructuring, this time of official debt. Italy’s debt burden continues to rise, to 131% of GDP this year, and debt in Ireland and Portugal is forecast to reach 123%.
SSDAN Office

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