The Eurozone’s turning point, Mario Draghi’s European Central Bank safety net, happened before the fourth quarter of 2012 even started. It triggered a chain reaction of improving confidence, which was just too slow to prevent this downturn. Capital returned to the periphery, but Eurozone leaders still needed to prove their resolve to tackle the economic problems. Economic sentiment turned when Dutch voters punished the Eurosceptics and Greece pushed harsh austerity through crunch parliamentary votes to avoid default. Borrowing costs are now falling, closing the gap with the US and the UK and boosting investment. Initial divergence shouldn’t surprise: this dip may have been a springboard for healthy Germany, but Italy and Spain still need to complete their reform homework before austerity can give way to growth. Risks still abound, but the base for recovery has been laid. Only France remains on a slippery slope towards crisis.
Dr Christian Schulz is senior economist at Berenberg Bank.
The Eurozone still faces deep problems. The division between the core and periphery is stark, but now core nations – like Germany and the Netherlands – are looking vulnerable too. The situation in the periphery is worse; the dismal labour market conditions are putting downward pressure on wages. But there are also potential external stresses: supply shocks, like a spike in oil prices, could stoke inflation and aggravate the situation further. The upcoming elections in Italy and Germany could also cause political instability. There are some positives, like steps towards a banking union; but nothing has been finalised yet. Eurozone GDP will probably contract by 0.5 per cent this year. And continuing weak demand, labour market upheaval, and austerity will weigh on growth for the next couple of years. It is going to be a hard slog to bring it out of the mire it is in.
Osman Ismail is an analyst at the Centre for Economics and Business Research.