Zero GDP growth in the eurozone for the last quarter of 2009 and a feeble recovery in the first quarter of 2010 is not what most of Europe’s finance ministers might wish to hear, but that’s the latest message from the OECD. It just shows what a challenge Europe faces in restoring the strength of public finances, most especially in Greece and other eurozone countries facing massive budget deficits.
There is certainly no sign of growth in the Greek economy. Yet without economic revival there is no way that Greece’s euro crisis can be resolved.
It seems clear that the package of “support” announced by Europe’s leaders on March 25-26 will do little to resolve the crisis. The package was so hedged about with conditions that the markets have given it little credence. The spread between Greek and German interest rates on ten year bonds has continued to widen, from three to four percentage points since the summit – not a sign of market confidence.
The summit statement is more of a threat than a promise. Bringing in the IMF as the first potential source of funding echoes the family threat – “just you wait till your father gets home” – the disciplinarian who can put on the pressure which European institutions cannot. And if bilateral support is required from fellow members of the eurozone it will be offered at quite explicitly penal rates of interest, despite the fact that the high cost of borrowing is a significant element in the Greek crisis.
Many commentators have identified the summit as evidence that Germany has turned its back on European integration. Indeed, it was quite a shock to see that even Charles Grant of the Centre for European Reform, a staunch supporter of European integration, could say that “not until this year’s euro crisis did I think the EU could go backwards”. He saw the summit outcome as symptomatic of deep divisions between Germany and France, of the isolationism of Germany, and of Europe’s introspection.
The summit did confirm beyond a peradventure that there will be no economic government for Europe. Any ambitions France might have in that direction are clearly thwarted despite a commitment in the summit communiqué to strengthen economic governance. President Sarkozy presented the outcome as a triumph for Franco-German co-operation; in fact it was largely Chancellor Angela Merkel’s work.
Germany’s dominance in European affairs is evident. Berlin is now more important to Paris than Paris is to Berlin. The economic challenge of German reunification has been met and relations with Russia have become a new priority. The German constitutional court has put the brake on any federalist tendencies. People may criticise Germany for its failure to boost domestic spending, but there is little sign of any response in Berlin.
Today’s OECD report has made one politician very happy: UK prime minister Gordon Brown. He can rejoice at the news that the British economy is predicted to grow at an annual 2 per cent rate in the first quarter of 2010 and by 3.1 per cent between April and June. Not bad timing for him, just one day after calling a general election. He can also take comfort from the fact that at least Europe is not likely to pose any problems for him on May 6 election day. After all, it was he that resisted Tony Blair’s wish for the pound sterling to join the euro in 1997!
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July 13, 2023