Skip to main content

Eurozone recession ends -- but it's too soon to celebrate

By Paul De Grauwe, Special to CNN
August 18, 2013 -- Updated 1234 GMT (2034 HKT)
STORY HIGHLIGHTS
  • The eurozone's second quarter growth rate reached 0.3%, better than last 18 months
  • There is joy in Brussels and Berlin as European leaders credit austerity with the shift
  • But, Paul De Grauwe says, the change could be due to a softening of austerity
  • And it is too early to celebrate an emergence from crisis

Editor's note: Paul De Grauwe is the John Paulson Chair in European Political Economy and Head of the European Institute at the London School of Economics.

(CNN) -- Spring is in the air. That's the feeling in Brussels and Berlin. The latest economic numbers issued by the European Commission seem to indicate that the eurozone has slowly crawled out of the recession.

The eurozone's second quarter growth rate reached 0.3%, still below the U.S. and UK growth rates, but better than the negative numbers of the last year and a half. Time to rejoice.

The joy was particularly felt at the headquarters of the European Commission. According to Olli Rehn, the Commissioner responsible for economic and financial affairs, this timid recovery vindicates the budgetary austerity strategy imposed on the eurozone member countries since the start of the sovereign debt crisis.

Read more: Fed wordplay no game for markets

According to the champion of austerity in Europe, the salutary effects of sustained austerity manifest themselves in the eurozone and explain the recovery. We should be grateful to Olli Rehn for having designed this strategy.

Europe still recovering from recession

The facts, however, point to something very different.

Does Europe need an industrial revolution?

In recent months the European Commission has had to relax its austerity programs in a number of eurozone countries, mainly because it became patently evident the programs did not work. Thus if there is a recovery today, it is because the Commission had to relax its austerity strategy.

Curtis: Problems in Europe will come back

This relaxation allowed budgetary policies in a number of countries, in particular France, to sustain economic activity, however feebly. The only country that has maintained budgetary austerity in all its severity is the Netherlands. It is also the country that, together with Italy, remains stuck in a recession.

Complete coverage: Eurozone in crisis

The view that fiscal discipline is the cause of the recovery is extraordinary, even surreal. It's like a thug who has beaten up his victim. After he has stopped the beating, the victim regains consciousness. That's when the thug says to his victim that he should be grateful, because the beating has made him stronger and allowed him to recover.

How sustainable is the recovery in the eurozone going to be? I see two risks that endanger its sustainability.

CEO: Cut public spending in eurozone

First, as the victim is recovering, chances are that the European Commission will want "to start the beating" again -- or intensify the austerity programs.

Europe rethinks apprenticeships

The relaxation from austerity that the European Commission decided last year was done halfheartedly. The recovery may be the occasion the Commission is waiting for to return to its favored strategy of intense fiscal discipline. If this is allowed to happen, the recovery will turn out to be only temporary.

Watch: Eurozone must cut spending, chief executive says

Latvia wants to join the euro club

A second more fundamental risk endangering a long-term recovery arises from the continuing split between the North and the South of the eurozone. This split has its origin in the fact that the North has accumulated large current account surpluses and the South current account deficits during the time before the eruption of the financial crisis.

All this has led to the situation in which the North consists of creditor nations, which want their money back from the debtor nations in the South. The whole austerity strategy has been driven by this split. It is a strategy imposed by the creditor nations and implemented by the European Commission, with the aim of making the South pay back its debt towards the North.

This strategy has had as a paradoxical effect of dramatically raising the debt to GDP ratios of Southern countries, because GDP has imploded while the debt could not be contracted. These debt ratios now exceed 100% in many Southern countries and continue to increase at a fast pace. Countries like Greece and Portugal have become insolvent, and others like Spain are reaching that state quickly.

Sustained recovery will only be possible if the creditor nations in the North, especially in Germany, recognize that the claims they hold on the Southern eurozone countries will not be repaid.

Read more: Portugal economy minister: We are suffering but will persevere

How long can ECB and BOE keep rates low?

Insisting that these countries repay in full condemns these countries to years, if not decades of recession and low economic growth. In the end they will not repay their debt. The reason is simple. Politicians in the South will not, for much longer, accept that fruits of austerity are used to service debts to foreign nations while inflicting great pain on their own citizens.

Telecom boss: Croatia needs reforms

The best growth strategy for the eurozone would consist in recognizing this fact and in accepting debt relief. This would make it possible for the Southern European countries to restart their economies unhindered by the shackles of unsustainable debt levels.

Unfortunately, this is unlikely to happen soon. The largest part of the claims held by Northern eurozone countries are now stacked in the hands of public institutions in the North of Europe. This makes it difficult to come to a rational solution.

In many Northern countries, emotional views of good and evil prevail today, leading to a desire that evil be punished. Southern eurozone countries are seen as having followed bad policies.

These have to be punished, lest they start behaving badly again. This attitude makes it difficult for politicians in Northern countries to choose the rational outcome of debt relief that would make a sustainable economic recovery possible.

The opinions expressed in this commentary are solely those of Paul De Grauwe

ADVERTISEMENT
Part of complete coverage on
July 12, 2014 -- Updated 0008 GMT (0808 HKT)
Tichleman 1
A makeup artist, writer and model who loves monkeys and struggles with demons.
July 11, 2014 -- Updated 1342 GMT (2142 HKT)
Lionel Messi's ability is not in question -- but will the World Cup final allow him to emerge from another footballing legend's shadow?
July 11, 2014 -- Updated 1029 GMT (1829 HKT)
Why are Iraqi politicians dragging their feet while ISIS militants fortify their foothold across the country?
July 11, 2014 -- Updated 1332 GMT (2132 HKT)
An elephant, who was chained for 50 years, cries tears of joy after being freed in India. CNN's Sumnima Udas reports.
July 11, 2014 -- Updated 0732 GMT (1532 HKT)
Beneath a dusty town in northeastern Pakistan, CNN explores a cold labyrinth of hidden tunnels that was once a safe haven for militants.
July 10, 2014 -- Updated 2249 GMT (0649 HKT)
CNN's Ravi Agrawal asks whether Narendra Modi can harness the country's potential to finally deliver growth.
July 10, 2014 -- Updated 0444 GMT (1244 HKT)
CNN's Ben Wedeman visits the Yazji family and finds out what it's like living life in the middle of conflict.
July 9, 2014 -- Updated 1423 GMT (2223 HKT)
Israel has deployed its Iron Dome defense system to halt incoming rockets. Here's how it works.
Even those who aren't in the line of fire feel the effects of the chaos that has engulfed Iraq since extremists attacked.
CNN joins the fight to end modern-day slavery by shining a spotlight on its horrors and highlighting success stories.
Browse through images from CNN teams around the world that you don't always see on news reports.
July 11, 2014 -- Updated 1634 GMT (0034 HKT)
People walk with their luggage at the Maiquetia international airport that serves Caracas on July 3, 2014. A survey by pollster Datanalisis revealed that 25% of the population surveyed (end of May) has at least one family member or friend who has emigrated from the country. AFP PHOTO/Leo RAMIREZ (Photo credit should read LEO RAMIREZ/AFP/Getty Images)
Plane passengers are used to paying additional fees, but one airport in Venezuela is now charging for the ultimate hidden extra -- air.
ADVERTISEMENT