It was a bold statement from Mario Draghi. "The worst is over," the European Central Bank chief said of the euro crisis in March 2012. He was wrong though -- at least with regard to the real economy. When Draghi made his prognosis, the combined economic output of the euro-zone countries had shrunk for the second consecutive quarter. Then it continued to slide downhill for another year.
But now, after the longest recession since the common currency's inception, the euro-zone economy is showing signs of new life. According to Eurostat estimates, the 17 euro-zone member states showed seasonally adjusted growth of 0.3 percent in the second quarter of 2013. Significantly, Germany saw growth of 0.7 percent, but France, too, came through with a surprisingly strong figure of 0.3 percent. In Portugal, the economy grew for the first time in two and a half years -- by as much as 1.1 percent.
The new data has prompted German economists to venture to make bold statements similar to those Draghi made a year and a half ago. "We are experiencing a trend reversal. The hardest part is behind us," Michael Hüther, head of the Cologne Institute for Economic Research, told SPIEGEL ONLINE. The chief economic forecaster at the Munich-based IFO Institute for Economic Research, Kai Carstensen, offered a similar analysis: "Everything is moving in the right direction -- upward."
In fact, the latest economic data aren't the only hopeful indicator:
- Companies in the euro zone are more optimistic now than they have been for the last year and a half. In July, the London-based Markit purchasing managers' index rose from 48.7 to 50.5 points, taking it above the threshold marking growth.
- In addition to business owners, consumers in the currency union are also getting more optimistic. Consumer confidence rose in July for the eighth consecutive month. In Germany, private consumption grew significantly, largely as a result of wage increases and rising employment.
- Some encouraging signs are also coming from the Southern European crisis countries. Prior to the economic growth just announced, Portugal, as well as Spain, has been able to report a drop in unemployment for the first time in two years. Both countries significantly reduced their unit labor costs and increased their exports. Even problem child Greece increased its exports and succeeded in reducing new government borrowing by more than half. The country's economy shrank by 4.6 percent, according to Greece's national statistics office -- but worse had been feared. No growth had been expected by Eurostat for Greece or Ireland.
- The at times dramatic situation on the bond markets has also calmed. The spread on interest rates for crisis countries and for Germany is much smaller than it was a year ago. On Tuesday, Italy and Spain both had reason to celebrate: Spreads on 10-year bonds from the countries compared to German bonds fell to a two-year low.
It is nevertheless too early for wholehearted jubilation. This is evident from the fact that the economies of other large euro-zone countries such as Italy (-0.2 percent) and Spain (-0.1 percent) continue to shrink -- albeit less sharply than in previous months. It would be "very surprising" if euro-zone growth were to continue throughout the year, says Jens Boysen-Hogrefe of the Kiel Institute for the World Economy. Still, he adds, "the outlook for 2014 is improving significantly."
Other factors, as well, indicate that the recovery won't be as rapid as might be hoped:
- At the end of 2012, the economies of many countries declined significantly -- a drop that continued into the first three months of 2013. The current increase in many countries has to be seen in the context of that development. "It was unlikely that we were going to stay in a permanent recession," says Boysen-Hogrefe. And in Germany, the construction industry is working to make up for a slow-down during the harsh winter. "A noticeable proportion (of growth) is coming from a backlog," says IFO economist Carstensen.
- Unemployment remains Europe's most crucial problem. With an unemployment rate of 12.1 percent in July, joblessness within the euro zone has climbed to its highest level since that data began being collected in 1995. The fact that in countries like Greece and Spain more than one in four people is jobless accounts for some seemingly positive indicators. Labor costs decrease, because fewer productive workers are laid off. And trade balances with other countries improve, because Southern Europeans are able to consume less.
- The improved situation is largely due to the European Central Bank. Its low interest rate policy is fuelling the stock market. Its announcement of unlimited bond purchases has curbed speculation. At the same time, neither measure solves the problems of the crisis countries. The fact is that they could lead to delays in reforms and encourage new bubbles.
- The state of the global economy remains uncertain. According to the latest World Economic Climate survey by Munich economic think tank Ifo, the mood has improved significantly in Europe and particularly in the United States. But in Asia, it deteriorated again after a strong improvement in the second quarter. The current uncertainty could be pegged to worsening forecasts for China. The government in Beijing has signalled that it may embark on economic stimulus programs in order to defend its planned growth of 7 percent. At the same time, though, it has only just begun to tighten regulations for financial markets that are overheated in many areas. "Cleaning up the mess is one thing," says Ifo economist Carstensen. "The other is the question of what is actually happened with the capital."
All things considered, though, things do appear to be improving in the euro zone. And this could fuel hopes in struggling member states that Germany may ease its demands for austerity after the Sept. 22 election.
Yet Cologne Institute for Economic Research head Hüther doesn't believe Berlin will budge. The German government, he notes, could argue that the developments show that austerity has worked. "The crisis countries can't say we need more -- and we can't say that we will give less," he says.
Boysen-Hogrefe doesn't expect any significant change in policy either. "The European Commission is already turning a blind eye or two," the Kiel Institute for the World Economy economist says. "And I don't get the feeling that politicians in Berlin are grabbing the emergency hotline to Brussels every time either."