Europe is screwed if this is as good as it gets

The eurozone just missed expectations for the third quarter, with GDP growth rising 0.3% from three months earlier.

That’s a disappointment, since analysts were expecting a 0.4% rise.

Unlike the United States, Europe calculates growth on a quarter-on-quarter basis, so the figure shows the total growth from the end of June to the end of September. In the US, that figure is annualised, so it seems much larger.

We’ve also got the figures from each of the three biggest economies in Europe:

  • Italian GDP rose by 0.2%, a weaker rate than financial markets were expecting.
  • French GDP rose by 0.3%, in line with what was expected, after a flat performance in Q2.
  • German growth also came in at 0.3%. That was also expected, and below the 0.4% recorded in Q2.

The Italian and German numbers are particularly worrying. The zone has had extremely loose monetary policy for years now — zero interest rates — yet these major economies are nowhere near the kind of robust growth they’re aiming for.

One of the few pieces of surprisingly good news was Greece’s performance. Though the economy contracted by 0.5% in the third quarter, that’s pretty impressive given the capital controls that were brought in during July.

As lacklustre as the European recovery seems, this is pretty much as good as it’s been for four years now. Q1 and Q2’s GDP growth of 0.4% was very slightly better, but other than that, it’s been the same or worse. The eurozone officially came out of recession 9 quarters earlier, and progress since has been painfully slow.

There’s even worse news when you dig down into the data. Germany’s economy is undoubtedly the bloc’s strongest. It’s been humming along slowly for most of the last three years, recording solid but unspectacular growth in most quarters. German GDP is now 1.8% higher than it was a year ago, and that’s the strongest figure it’s recorded in 18 months.

Italy is probably the most depressing example. Take a look at this:

Italy never saw anything like the frothy expansion that Spain did during the early years of the eurozone. In the near-decade of the single currency’s existence up to the 2008 financial crash, Italy grew by only about 15%. It’s since slumped, and is nowhere near a full recovery, sitting nearly 10% below its 2008 levels.

When measured on a per-capita basis, Italy hasn’t grown at all since the euro was introduced. People talk about Japan’s lost decades, but Japanese real GDP per capita has clearly outperformed Italy over the last 20 years.

Spain has undoubtedly had a rough ride since the financial crisis, and output is still some distance from returning to peak levels — but at least it had a boom in the first place. Along with Ireland, Spain is paraded by European authorities as one of austerity’s star performers, bringing in necessary structural reforms early and reaping the benefits. But with unemployment still over 20%, it seems gruesome to celebrate.

There are some nuggets of positivity. From next year, the fiscal squeeze on eurozone economies should loosen a little. After years of budget-cutting to try and comply with the bloc’s strict rules on spending, many have now just about reached the 3% of GDP deficit limit.

If the European Central Bank also chooses to do something dramatic in December, that might also offer some more support to the economies.

Average growth for the eurozone prior to the financial crisis was about 0.6% to 0.7% per quarter. That’s similar to what the UK and US have been recording for a while now, but it feels like it’s still a very long way off for Europe.

The picture is depressing even before you start to think about how unprepared they would be for another financial crisis or recession.

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