Germany-led Eurozone on the Pathway to Recovery: Rhetoric versus Reality

Written by | Thursday, August 29th, 2013
Arif Budiman

The eurozone seems to have bounced back from the 2008-2009 financial crisis, as Olli Rehn, EU Commissioner for Economic and Monetary Affairs, reported the 0.3% second-quarter growth. Also German Chancellor Angela Merkel looked very pleased after Germany had revitalized its exports and attained record low unemployment figures while other EU member states were still reeling from the protracted recession. However, EU Commissioner Rehn also expressed his uneasiness about the sustainability of the nascent economic revival – there are widespread concerns that the eurozone’s positive growth rate is prevalently the result of Germany’s brisk growth rather than the overall improvement in the economic and investment climate throughout Europe.
Germany could have been more than satisfied with its recent economic successes, such as low borrowing costs, growing housing market and a massive influx of skilled workforce trying to escape faltering conditions elsewhere in Europe. Fiscal austerity, structural reforms and a implementation of some new labor market legislative have all apparently contributed to the rebound. Nonetheless, Germany may still be at odds with the decaying situation in other member countries. Berlin needs a healthy Europe able to absorb a substantial part of German exports. Otherwise, the country would have to increasingly rely on the demand from emerging and developing markets, particularly in the Asia-Pacific region, which can prove to be a risky business.
Indeed, the market turmoil throughout Europe is seemingly over as sovereign bond yields have eased but the modest growth figures from the eurozone are all but a weak camouflage of more serious (mainly structural) problems still facing the ‘Old Continent’. In the run-up to the German federal elections that are to take place on 22 September, the question of Greece and other economies ‘in danger’ has become a number one issue despite Angela Merkel’s struggle to avoid dragging the entire matter of indebtedness into the pre-election debate. Incumbent German Finance Minister Wolfgang Schaeuble also contributed to the discourse saying that Greece is very likely to need another package of financial debt in addition to its two already running bail-outs that include an aid package from the International Monetary Fund (IMF). Chancellor Merkel has vigorously denied such concerns, but with Greece’s bailouts already totaling around 240bn EUR, IMF estimating that its financing gap for 2014-2015 would be about 10bn EUR, and Athens still failing to implement many of the public sector reform targets, the pre-election rhetoric in Germany may still bring some unpleasant surprises both to officials in Brussels and the still jittery bond markets.
Portugal, alike, has lately demonstrated some signs of economic ‘bleeding’. Earlier in August, in the wake of resignations of the country’s two ministers, Portuguese 10-year government bond yield deteriorated and the consolidation plan worth 78 billion euro imposed by the European Commission, the European Central Bank and the IMF, had also got stuck. Portugal seems to be the next in line for an extra rescue kit. However, amidst the pre-election campaign, Angela Merkel will be probably trying to relax bail-out conditions in order to stabilize the already unstable ‘Mediterranean,’ whereby ensuring the much-needed stability in the European financial markets. According to Liam Halligan, the chief economist of Prosperity Capital Management, there is a widespread expectation in financial markets that once Merkel secures her re-election by managing the bail-out system and loan terms in the problematic EU countries, ECB boss Mario Draghi will get the “nod” to conduct much looser monetary policy in an attempt to reflate asset prices.
Nevertheless, investors seem to approve of skeptical opinions about the future economic development in Europe despite some top European politicians attempting to reverse the tide. “What you need to understand here in Japan is that the crisis in Europe is over” – the famous utterance of the French President during his recent visit in Japan is still not reflecting reality – FDI figures are still too modest to prophesize a ‘new beginning’ in the European market.

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