Unorthodox measures from the ECB cannot make up for the underlying design defects of the euroby Paul Wallace / March 13, 2019 / Leave a comment
The euro area has made a dispiriting start to 2019. Gone is the backslapping that accompanied its 20th anniversary on 1st January. As so often in its chequered history, the monetary union appears better at surviving than thriving. But just how bad have things become and what is the root cause of the problem?
For a brief moment, in 2017, the euro area was on a roll as GDP expanded by 2.4 per cent, the highest for a decade. But the sun wasn’t out for long before clouds started to mass. Growth slowed from a sprightly quarterly average of 0.7 per cent in 2017 to a still acceptable 0.4 per cent in the first half of 2018. But then the sky darkened further, as GDP rose by a mere 0.1 per cent in the third quarter and 0.2 per cent in the fourth.
That wrenching deceleration has affected both the weakling and the strongman among the big economies in the euro area. Italy, the third largest but long fragile economy, went into recession as output declined over two consecutive quarters. More unusually, the biggest has powered down, too. Accounting for around 30 per cent of eurozone GDP, Germany has been the mainstay of the eurozone economy since the financial crisis. But the bloc’s powerhouse only narrowly managed to dodge a recession at the end of last year as German output stalled in the fourth quarter after falling in the third.
The introduction of new vehicle emission tests for the car industry contributed to Germany’s economic reverse especially in the autumn. But worryingly, business surveys show that the setback is continuing this year. Although the services sector has picked up, manufacturing, the engine of the German economy, deteriorated further in early 2019. Chiming with the message from surveys, official figures published on 8th March show that new manufacturing orders fell in January by 2.6 per cent, leaving them 3.9 per cent down on a year earlier. And figures out on Monday showed that a broad measure of industrial production fell by 0.8 per cent in January, leaving output 3.3 per cent lower than a year earlier.
The main brake on Germany and the wider euro area has come from sagging trade. For a large economic area, the eurozone is particularly open not just to…