Forget Greek misery: Why Europe is turning a corner thanks to structural reform

Gerard Walsh
AN OBSERVER coming to study “Europe” with fresh eyes and an open mind might well conclude that there is only one game in town: the ongoing negotiations between Athens, Brussels and Berlin over the Greek bailout. Clearly, the outcome is vitally important for the people of Greece, the Greek government’s credibility, and that of the Troika and politicians at national and supra-national levels. But this focus on politics risks obscuring a number of significantly positive developments in the European economy more broadly.

Europe and its constituent countries have been shrouded in gloomy forecasts for more than half a decade, with Germany one of the few consistent bright spots, not least after its blockbuster economic performance in the final quarter of 2014. Arguably, much of the recent non-German melancholy has been driven by commentators viewing Europe purely through a political lens, with Greece the poster child for “Europe isn’t working”. Of late, the negative news has been compounded by the outbreak of deadly conflict in Ukraine – a matter that needs peaceful, brokered resolution as a matter of humanitarian urgency.

If you avert your gaze from Athens and Kiev, however, elsewhere in Europe the sun is beginning to break through the gloom. There are increasing numbers of positive signals in more sectors, and across more countries, than has been the case for many years. We are seeing inflection points in a number of economies, with the barometer gently ticking up from decline towards growth.

In the UK, employment is touching record levels, inflation is touching record lows and, most importantly, consumer sentiment is becoming more positive. In Italy, the need for structural change is widely recognised and, at long last, under Matteo Renzi, a political will to deliver much-needed reform is emerging. Indeed, just yesterday, the OECD applauded the Italian Prime Minister for his “courage” in seeking change. Italy has tremendous untapped capacity and creativity within its highly-educated, highly-skilled population and there are signs of reform, particularly in the banking sector, that could unlock it.

The same applies to France. Companies reporting in this quarter in many sectors – banking, telecoms, construction, advertising, and automotive manufacturing – say that they are facing up a growth curve, not down a decline trough. Spain too has steered through some tough but necessary reform (again, primarily in the banking sector). The fourth quarter of 2014 saw significant upturns in retail sales figures – a good sign that people at an individual level are feeling more inclined to the positive.

The growth we are seeing is fragile and delicate, as are all green shoots. There is much to do, not least at the policy and geopolitical level, and we can’t discount the possibility of missteps jeopardising growth. As we have seen in Japan, with its somewhat unwise increase in its consumption tax just as recovery was taking hold, it is not always easy to predict the results of policy errors.

The important point is that growth – accompanied by a sunnier outlook – seems to be returning to a rising number of individual European companies, countries and the region’s economy as a whole. Don’t let Greece mask this.

Gerard Walsh is chief business officer at institutional equity brokerage Aviate Global.

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