The euro zone’s fourth-quarter numbers conjure images of an arduous pan-European cycling race. France and Germany are pulling away from the pack, while the countries of the periphery are bunched together, wobbling and falling further behind. Fiscal cuts are sapping the periphery’s speed. The question is whether their competitiveness is improving. Labour cost and trade figures don’t suggest it is – at least not yet.
France’s economy grew by 0.2 per cent in the fourth quarter; Germany contracted by 0.2 per cent. In each case their speed was better than expected. Mild weather, which favours construction, may have helped. But certainly Germany’s resilience was due to more than that. The German ZEW business confidence survey leaped in February to its highest level since May. US demand is picking up. Germany may surprise positively by growing in the first quarter.
But, because Germany is heavily export-dependent it does not do much to pull its neighbours along. So the periphery is dropping further back. The Portuguese economy contracted 1.3 per cent in the fourth quarter, Italy 0.7 per cent, Greece by a staggering seven per cent year-on-year.
Are cuts and reforms making these economies fitter? The answer may be yes in Ireland, which cut its labour costs by 1.1 per cent year-on-year in the third quarter. Portugal’s rose by only 0.8 per cent. But labour costs in Spain rose by 3.9 per cent, compared to rises of 2.9 per cent in Germany and 3.1 per cent in France, and Italy’s by 2.2 per cent, only a little better than in the core. Belated reforms in Spain and Italy need to make a material difference.
The competitiveness problem is also evident in the periphery’s trade numbers. Recession normally slashes deficits by reducing imports. But Greece was still running an over eight per cent of GDP deficit on current account late in 2011, Portugal’s deficit exceeds seven per cent of GDP and those of Spain and Italy exceed three per cent. Only Ireland has joined strong core countries like Germany, The Netherlands, Belgium and Austria by moving into trade surplus.
It isn’t just debt that matters. Growth and competitiveness are the key to keeping the periphery in the race. At present the stragglers aren’t offering much to cheer.
