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Systemically challenged

11 Dec 2013 By Ian Campbell

British growth is forging ahead of the euro zone’s. UK austerity has been more effective, the pound is cheap, the housing market suddenly all too lively. But British simplicity also helps. A Germanically strong euro weighs heavily on a still systemically challenged zone.

Europe’s crisis outcomes could hardly be more divergent. According to Eurostat estimates, Germany’s GDP will end this year 4.2 percent bigger than its pre-crisis peak, France 0.7 percent bigger and the UK 1.9 percent smaller. But the euro periphery has been hammered, with the Spanish, Italian and Greek GDPs down by 5.9 percent, 8.7 percent and 23 percent respectively.

Though the UK’s crisis has been deep and long, its current pace of growth – an annualised 3 percent in the past two quarters – suggests it’s forging ahead. The zone grew by just 0.1 percent in the third quarter.

The faster British recovery reflects many factors. The financial rescue was faster and more thorough. The mix of government spending cuts, rate cuts and significant quantitative easing kept gilt yields low and has made mortgage repayment costs their most affordable since 1999. A 46 percent rise in the personal income tax allowance has been a tax cut for the low paid. New credit schemes are lending with unseemly speed to the housing market’s revival. The labour market is flexible. And relatively cheap sterling has helped.

By contrast, euro zone policy moves slowly. Banking union lags. The European Central Bank has been less dynamic than the Bank of England, although no monetary policy can solve the region’s competitiveness and fiscal problems. Those problems include Germany’s huge export surplus, which keeps the euro strong and forces the rest of Europe to adjust. Fiscal austerity, needed to cope with debts, has tended to add to tax burdens.

The UK, bolder on spending cuts than the zone’s major economies, may be reaping benefits, although the recovery is still largely cyclical. But the euro zone is not even seeing much of a cyclical boost. Germany ploughs on but the weaker nations’ reforms of labour markets and bureaucracies have simply not been profound enough to cope with the demands of a strong euro. 


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