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News : EU Economy Last Updated: Apr 17, 2013 - 9:22 AM


Weak Eurozone recovery in 2014; Draghi again calls for reforms
By Michael Hennigan, Finfacts founder and editor
Apr 16, 2013 - 9:10 AM

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Financial conditions in Europe, and especially the Eurozone, will likely translate into another year of negative growth, with the prospect of only a weak recovery in 2014, in Standard & Poor's view. The ratings agency forecasts GDP (gross domestic product) in the Eurozone will decline by 0.5% this year and bounce back by a still modest 0.8% next year. Meanwhile, on Monday, Mario Draghi, ECB president, again called for reforms in struggling economies.

Jean-Michel Six, the Paris-based EMEA chief economist of Standard & Poor's said in  areport last month: "Export performance has varied considerably among European countries since 2007 (see chart 4 above). Using German exports as a benchmark, we see that Spanish, and to a lesser extent Portuguese, exports have consistently performed well. Spain's foreign sales were up 17.5% from 2007 in the final quarter of 2012, compared with 14% for Germany. On the other hand, French and especially Italian exports have underperformed. French foreign sales were up just 2.6% over the same period, while Italy's were down 0.8%."

Mario Draghi, ECB president, said in a speech on Monday in Amsterdam, that the way out of the problems facing many Eurozone countries is to restore competitiveness. "And the way to do this in the context of a monetary union is to pursue with determination an ambitious structural reform agenda. Such an agenda comprises a number of national measures to make sure that the functioning of product and labour markets is fully compatible with participation in monetary union. One specific aspect is to fight vested interests that hamper competition, structural weaknesses of productivity and to allow, where needed, the nominal adjustments to play out." Italy, Draghi's own country, is facing problems it has allowed to fester for decades.

Italy experienced a marked economic slowdown in the 1990s, with real GDP growing by an annual average of only 1.2%, down from 2.2% in the 1980s. The decline in Italy’s trend growth rate was much greater than that experienced by EMU (European Monetary System) countries: on average GDP increased at an annual rate of 2.3 % in the euro area, down from 2.4 % in the 1980s. Italy’s GDP increased by less than 3% in 2001-2010 -- an annual rate below 0.3% and compared with a euro area average of 1.2% [pdf].

Part of the 1990s performance resulted from reforms in advance of the launch of the euro in 1999.

Italy, Spain and Portugal not only had high youth unemployment levels in the past but also high secondary education dropout levels.

In 1998, the Italian unemployment rate was 12.2% and 12.6% in February 2013; youth unemployment (under 25s not in education or formal training) was 32.9% in 1998 and 37.8% in 2013. In Spain in 1998, the unemployment rate was 18.8%;  youth unemployment was 35.7% and 55.7% in 2013.

In 1998, the employment rate (15-64s) [pdf] was 60.8% in the then EU15. It was 75% in Denmark; 63% in Germany; 50% in Spain and 51% in Italy.

Of the percentage of the population aged 18-24 with at most lower secondary education and who are currently not in further education or training, in 2005, it was 30.8% in Spain; 38.8% in Portugal; 22.3% in Italy; 11.6% in the UK and 12.5% in Ireland. In 2012, the numbers were: 24.9%; 20.8%, 17.6%; 13.5% and 9.7%. Eurostat report [pdf]

A European Commission report in 1999 said the Italian employment rate, already low at the beginning of the 1960s, continued to decrease, with the gap vis-à-vis other euro area countries (not particularly good performers themselves in this respect) widening further; employment was particularly low in the case of new entrants, females and older workers, whilst the employment rate of prime-age males remained fairly high. Over two thirds of unemployed people had been out of work for more than a year.

It said that an analysis of Italy’s manufacturing trade profile showed a distinct lack of specialisation in the skilled labour-intensive sectors which had been the most dynamic sources of demand growth in Italy’s major export markets. Italy’s pattern of trade specialisation instead revealed a continued bias in favour of traditional, unskilled labour-intensive sectors. Even if Italy’s exports in the unskilled labour-intensive sectors were of a higher quality than those of most developing countries, these sectors had contributed only weakly to demand growth in world and EU markets.

Since 2001, traditional sectors such as shoemaking, furniture and textiles have had to deal with competition from both Eastern Europe and emerging markets such as China.

Changing course is not easy and there are no magic solutions.

Italy has a 73rd ranking behind Romania in the World Bank's 'Doing Business 2013' [pdf] which ranks how easy it is to start and run a business, pay taxes etc. Ireland is at 15, Malaysia 12 and Singapore at no. 1.

Italy does however have low household debt and it runs a primary budget surplus (before debt interest costs) while its sovereign debt is at 127% of GDP.

Jean-Michel Six, of S& P says in his March 2013 report [pdf]: "The return to more normal monetary and financial conditions within the eurozone is likely to take time as banks continue to repair their balance sheets. The payback on the second LTRO (3-year long-term financing from the ECB) in March proved disappointing, with only 13% of the total amount actually returned. The partial payback of the first LTRO in January had amounted to 31.8% of the total, signaling some stabilization in credit conditions. The result of that second wave shows that stabilization is still in its early days. This implies that credit conditions will remain tight in 2013 and perhaps even through to the start of 2014, which is likely to slow or delay the recovery in capital spending.

Meanwhile, households will remain constrained, given the high debt in many countries (see table 1 above). Among countries where consumer debt was very high at the beginning of the crisis, only in Ireland and Spain has it reduced significantly. By contrast, debt continued to rise in the U.K. and, even more so in The Netherlands."

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