Europe growth rates diverge

Europe growth rates diverge

By Ralph Atkins in Frankfurt

Published: April 8 2008 23:01 | Last updated: April 8 2008 23:01

Europe’s economic “weather map” is showing widening divergences, complicating the task of policymakers as global financial market turmoil sends storm warning signals.

Economic confidence indicators, as well as other recent data, have pointed to startling differences in performance across the 15-country eurozone and beyond.

If eventually reflected in growth figures, such differences could revive arguments that have beset the European Central Bank since the launch of the euro in 1999 over the effectiveness of a “one-size-fits-all” monetary policy. The ECB holds its next interest-rate-setting meeting tomorrow.

Direct real-economy effects of the US subprime mortgage crisis are hard to spot in Europe, but fears about a US recession, the euro’s record strength, tumbling asset prices and slower global growth are taking their toll – yet with seemingly contrasting effects.

Among the countries facing the most profound turnaround is Spain, which economists believe could face a serious house-price correction. Once among the fastest growing eurozone economies, Spain has seen its economic confidence fall to the lowest level since early 1994, according to the European Commission. Unemployment has also started to rise.

But even after the immediate storms, the outlook for Spain may remain cloudy.

“With the euro, it is quite possible that adjustment processes are different and take longer – it takes a long time to get into these situations, and a long time to get out of them. This has been the story of Germany over the past decade,” argues Robert Barrie, European economist at Credit Suisse.

Elsewhere, John Hurley, Ireland’s central bank governor, says euro membership has ensured greater stability than in the days of national currencies. “At times like this, the protection afforded to a small country by membership of the euro area comes sharply into focus,” he remarked recently.

Germany is now arguably at the other extreme – where confidence has risen since the start of the year and unemployment fallen sharply. Julian Callow, from Barclays Capital, says it is the external balances of European countries that “really give the game away” when it comes to revealing widening divergences.

Europe: A mixed forecast

Germany’s current-account surplus – largely powered by manufacturing exports – reached almost 8 per cent of gross domestic product last year. In Spain, the housing market-induced domestic boom stoked imports and helped expand the country’s deficit to more than 10 per cent of GDP.

Less clear-cut is the outlook for France, where the service sector’s growth remains firm, according to purchasing managers’ indices, and joblessness is also falling, but worries remain about inflated house prices.

Italy, meanwhile, saw a sharp drop in activity at the end of last year and, amid long-standing worries about its competitiveness, looks likely in 2008 to live up to its reputation as the sick man of Europe.

Beyond the eurozone, the outlook is mixed. Across Scandinavia, growth is slowing on the back of the gloomier world economic outlook, with local competitiveness threatened by labour shortages and higher wage deals, though no dramatic darkening of fortunes is in sight.

Occasional thunderstorms are possible across central and eastern Europe where the global credit squeeze, rising inflation and a likely US recession are all harming the economic climate in former communist countries, including Russia. A handful of countries with big current-account deficits – and external financing needs – have come under pressure, notably Romania, Bulgaria, Latvia and Hungary. But overall, the region remains in good economic condition.

Indeed, the recent moderate growth slowdown could even prove beneficial by helping states curb inflation.

Within the eurozone, the ECB’s main concern will remain the region’s worryingly high inflation. In practice, there is not much it could do itself about divergences anyway, given its supranational responsibilities. Mr Barrie says: “The ECB will look at what it all adds up to, rather than where it is happening.”