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August 14, 2013

Eurozone Emerges From Recession

by Henry Ridgwell

The eurozone has finally emerged from 18 months of recession - posting positive growth after unexpectedly strong consumer spending in the currency bloc’s core economies. Analysts are warning, however, that this is not the end of the euro crisis.

After six consecutive quarters of negative growth, the eurozone is finally recovering. The growth figure of 0.3 percent in the second quarter hardly signals a boom - but it is a milestone, said Daragh Maher, foreign exchange strategist at HSBC in London.

“The very fact that we can talk about growth, politicians can talk about growth, markets can talk about growth again - it’s a significant psychological development,” said Maher.

Portugal posted the strongest growth of the quarter - expanding its economy by 1.1 percent. Good news for a country that had been forced to take a $102 billion bailout from the European Union and International Monetary Fund.

But it was the eurozone’s powerhouse economies of Germany and France that hauled the currency bloc out of recession.

Germany grew 0.7 percent and France by 0.5 percent - both driven by higher consumer spending and industrial output. The figures surpassed many economists’ forecasts, said Maher.

“That’s encouraging because, in a way, if the core is at least driving things forward and recovering, they’re in a better position politically and economically to provide the support that the peripherals perhaps still require,” said Maher.

The problem for the eurozone remains its indebted southern periphery.

Spain’s economy contracted by 0.1 percent. In Italy, also struggling with debt and unemployment, the economy contracted by two-tenths of a percent.

And in Greece - ground zero of Europe’s crisis over the past four years - the economy shrank by 4.6 percent. That’s a slight improvement on the previous three months, but indicative of the euro’s ongoing problems, said Joe Rundle, head of trading at ETX Capital, a London-based financial services firm.

"Germany is booming, France is doing okay, but you've got to look at southern Europe, and they are in real dire straits. So you've got this two-tier Europe, and Germany really controlling the austerity while it's booming. So I think it's not the eurozone problems being solved," said Rundle.

That appears to be recognized in Brussels. Chantal Hughes, a spokeswoman for the European Commission, said, “This slightly more positive data is welcome, but there is no room for any complacency. Self-congratulatory statements suggesting that the crisis is over are definitely not for today. There are still substantial obstacles to overcome. The growth figures remain low, and the tentative signs of growth are still fragile.”

The EU is holding back on the celebrations. After one and a half years of painful contraction, though, analysts say the growth figure is welcome news as Europe’s politicians prepare to return from summer vacation.