Eurozone tremors continue to ripple out – ECR Q2 2013 results

The French position epitomizes the lingering fault lines still afflicting the eurozone, as its embattled policymakers grapple with the effects of the continuing crisis and have resorted to a more moderate approach to fiscal austerity by extending programme target deadlines to allow the region’s economies to recover.

However, the impact of this policy shift remains unclear, as it might simply postpone the necessary fiscal adjustment without necessarily ensuring sufficient structural reform or reviving GDP growth, which appears to have become ever more elusive for many member states.

Another contraction of 0.5% is predicted for eurozone real GDP this year, according to the latest monthly Euro Zone Barometer for June – a survey of independent private sector opinions – while the upturn pencilled in for 2014 has been successively downgraded in recent months to 0.9%.

Meanwhile, the regional unemployment rate hit a new seasonally adjusted high of 12.2% in May, according to Eurostat, with 3.6 million young persons of working age (under 25) without a job, out of a total of 5.5 million across the EU-27 – prior to Croatia joining the Union on July 1 – thus adding to governments’ fiscal costs and social-instability risks.

Although the majority of the 17 eurozone member states have seen their risks stabilize or even reduce a little between March and June, their ECR scores are still at very low levels and the eurozone’s negative score differential to North America has doubled in three years to reach a record 12.6 points.

Ten member states, moreover, have lower scores compared with the end of 2012, and there are no fewer than nine still boasting unenviable double-digit score declines compared with three years ago, led by Greece (a drop of 36.0 points), Spain (down by 22.8) and Cyprus (22.3) – the latter crashing in Q1 when its banking crisis erupted.

Mini-recoveries have been seen in some member states, notably in Ireland and Austria, but as is clear from the recent problems in Greece – which include the withdrawal of a junior partner from the three-party coalition, and the continuing difficulties in enacting deep and painful budget cuts – as well as in Portugal, where tensions are also surfacing between the two governing parties amid ministerial resignations and similarly unpopular reforms, the political dimensions to the crisis still predominate.

As Bernard Musyck, one of ECR’s experts, and associate professor at Frederick University in Cyprus, says: “There has been a lot of procrastination going on. In Greece and Cyprus we have being waiting until the last minute before the government has implemented fiscal reform and economic measures.

“There is no tradition of collective sacrifice for collective gain in the south, whereas in the north of Europe there is a better understanding among the population that you have to make some sacrifices to achieve a better political outcome. People understand that austerity on its own without growth will not lead anywhere, so in the middle of these fiscal consolidation programmes it is very difficult to see where economic growth will emerge.

“The big mistake among Mediterranean economies is that they are trying to consolidate their finances by just cutting costs by cutting jobs, benefits and salaries. But if they don’t restructure the way they do things, for example by opening up the professions, reducing the level of bureaucracy and so on, they will not solve anything. So this is another important obstacle that is impeding long-term growth.”

Large debts and unstable banks have contributed to further score declines for a number of euro states, including Malta, Belgium, the Netherlands and Slovenia, the focus of much debate in recent years among experts and credit rating agencies (see Moody’s dubious rating decision divides opinion).

As eurozone sovereigns struggle to keep their fiscal targets on track to maintain financial support, euro participation is still being questioned for some countries, such as Greece and Portugal, in an extreme, worst-case scenario.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.