The euro zone is doing better, but its latest improvements are worryingly uneven. Germany remains far ahead. This unbalanced recovery could lead to more trouble.
Euro zone business activity hit an unexpected 26-month high in August, according to the monthly Markit composite survey of purchasing managers. The improvement will fuel hopes that the much-anticipated euro zone recovery is finally gaining momentum.
This no longer looks totally like wishful thinking. Euro zone GDP grew 0.3 percent in the second quarter, beating forecasts and expanding for the first time since 2011. But as with the latest PMI improvement, Europe’s largest economy stood out. Germany grew 0.7 percent – second only to Portugal, whose 1.1 percent expansion looks like a statistical aberration.
Flourishing Germany contributed 28 percent of the euro zone’s total GDP in 2012, but it is premature to speak of a recovery for many of the countries of the other two-thirds. GDP in the Netherlands, usually counted as a European core, shrank in the quarter, and its outlook for the year looks bleak. Greece and Cyprus are faring much worse. In fact, the non-German euro zone grew by a miniscule 0.1 percent. There would have been no growth at all without an unexpected boost from France.
While the most recent economic indicators are improving – or less terrible, anyway – they remain severely unbalanced. The unemployment rate in Greece is almost 30 percent; in Germany it is 5 percent. Greeks can read about a euro zone recovery, but few of them feel it. The same is true for Spanish and Portuguese businesses, with minimal access to credit and painfully high borrowing rates.
Of course, a strong Germany is better for the euro zone than a weak one. It will import more from its neighbours and its strength will support confidence in the region. But persistent growth imbalances can lead to other problems. Resentment and reform fatigue will worsen as divisions deepen between strong and weak and between borrowers and lenders. A strong region-wide performance could take away pressure for hard reforms in laggard members.
A German stumble would make the recovery more balanced, but it would be better if the non-German part of the euro zone caught up.