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Wednesday, 10 December 2014

Zero-In: Euro Zone Woes Continue

The economic saga, now into its sixth year, continues in Europe with the peripheral parts of the bloc remaining gripped in severe recession. The previous woes of low investment, mass unemployment in the south, sovereign debt default and a currency crisis are again haunting economic policy makers.

Latest official data from European Union's statistics agency confirm that the economy has stagnated. The currency area's gross domestic product was just 0.2 percent higher in the third quarter than in the second, a slight acceleration from the 0.1% expansion recorded in the three months to June.

The data also confirmed another concerning trend of falling investment, which is continuing to stifle the Euro bloc's economic recovery and disappoint expectations this year. Investments in spending fell by 0.3%, in the third quarter of the year, according to Eurostat, The latest investment data underscores the lack of confidence businesses have in the economy picking up in 2015. 

Mindful of the shortfall in investment across the eurozone, the European Commission President, Jean-Claude Juncker, has launched a kick start plan aimed at enticing pension funds, insurance companies and other large investors to finance infrastructure projects across the European Union.

But economists have questioned whether the plan would be able to raise the targeted amount of money and noted that it will take some time to select and launch projects.

Meanwhile, with lacklustre private business investment on the table, job creation has been weak. Unemployment remains high and may even start rising again, unless investment picks-up. Additionally, the bloc's Balance of Trade deteriorated slightly, despite depreciation in the euro's exchange rate, with exports rising more slowly than imports. This worsening Balance of Trade also provided headwinds on growth. The European Central Bank's economists Thursday cut their forecast for economic growth in 2015 to just 1.0% from the 1.6% projected in September. 

On a slightly more positive note, consumption increased by 0.5 percent in quarter. The very low levels of inflation appear to have boosted the real spending power of households, aiding a 0.5 percent increase in their consumption during the quarter. Collapse in the oil price is likely to put some change in consumers' pockets going forward. So the trend of consumption picking up should continue, unless there is a rise in unemployment rates going forward. 

Responding to the prospect of continued low growth and inflation, ECB President, Mario Draghi, may be looking at the options available to stimulate the euro zone's near-stagnant economy. But a decision has been deferred until early 2015 amid signs of continuing divisions over the right course of action.

Economists said that even if the ECB does decide to provide more aggressive stimulus in the form of quantitative easing--or large-scale purchases of government bonds--that won't be enough to significantly boost investment and growth.

Indeed, Mr. Draghi has repeatedly said further action by the ECB will have to be accompanied by labour market reforms in Italy and France, as well as an easing in the pace of budget cuts in parts of the Eurozone.

"These are the two laggards", said Mark Zandi, chief economist at Moody's Analytics. "They haven't made significant progress toward reforming labour and product markets. Otherwise, the Eurozone will be stuck in a rut." 

"I don't know if policy makers will muster the political will without being visibly pushed by financial markets", Mr. Zandi said. "I believe it won't happen unless there is another round of financial turmoil, another chapter in the debt crisis. The crisis isn't over."

Indeed, Greece will have to ask for an extension on its bailout program before parliaments in Eurozone nations close for Christmas, because a new credit line will not be ready in time, a senior euro zone official said on Wednesday.

After two bailouts totalling 240 billion euros ($300 billion) since 2010, Greece wants to switch back to market financing from the start of next year but disagreement over Greece’s funding needs next year means the euro zone cannot sign off on a back-up credit line.

“I’m willing to work on Dec. 24 but parliaments are not around,” the official told reporters on condition of anonymity, setting Dec. 15 as the cut-off date for prolonging Greece’s existing program into January so that lenders can make a final 1.8 billion euro payment.

All Eurozone parliaments must approve that extension.

Greece and its lenders aimed to get a deal on a credit line – which Athens would only tap in an emergency – by next Monday from the International Monetary F
und, the European Commission and the European Central Bank. Greek Prime Minister Antonis Samaras has staked his government’s political survival on exiting the deeply reviled bailout by the end of the year, but a deal on Monday is now looking out of reach.

“Is it my central expectation that a staff-level agreement (on a credit line) is reached by Monday? No, it is not”, the euro zone official said.

The main wrangling issue is over Greece's widening budget gap.

So, if the Greek credit line deal goes pear shaped that might give the bond market the wobbles next week.

Meanwhile, Germany is feeling smug about its public finance, 2015 has been described as “black zero,” which translates to no new borrowing. But the opposition party is less impressed complaining about the crumbling roads, bridges and ports etc. that need doing.


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