Eurozone’s uneven recovery needs attention

The eurozone’s economy is increasingly out of kilter. In manufacturing hotspots, such as Germany, activity levels are surging. But the region’s services sector, which has long accounted for the bulk of output, has gone into reverse. September readings for services taken from a closely watched poll of purchasing managers have sunk back to levels last seen in May. On a national level, the impact was most striking in Spain, which has faced the most aggressive second wave of coronavirus so far. Activity levels in France, another member state hard hit by a resurgence in cases, and Ireland are also falling.

As second waves have struck, an economic hit was inevitable. Strong retail trade figures across the region — published this week, but dating back to August when restrictions were looser and caseloads lower — offer false hope. By September, improvements in business and consumer confidence over the summer months had all but petered out. Real-time indicators of activity, measuring declining footfall and trips to transport hubs, serve as a grim reminder of the economic damage wrought by the virus. Even in stronger economies such as Germany, companies in hard-hit sectors such as airlines and automobiles are planning mass lay-offs.

While the chances of a contraction in the fourth quarter are rising, the region will probably insulate itself from a collapse in output of the scale witnessed between the first and second quarters, when GDP crashed by 12.1 per cent. One aspect of the eurozone’s response set to shore up demand is the extension of job retention schemes, which pay out a portion of the wages lost from fewer hours worked, across the region’s largest economies. Germany’s and Italy’s economies have benefited not only from a recovery in trade, but from better containing the virus. Neighbouring EU member states in central and eastern Europe, which handled the first wave well owing to timely and strict lockdowns, may wish to look to them — as well as other strong performers such as Finland and Lithuania — as they seek to tackle a rise in cases.

More must be done, however — not least because the asymmetry of the region’s recovery risks deepening longstanding divisions between north and south. Of the big economies, it is Spain that must act with the greatest speed and resolve. Italy, too, must not rest on its laurels, despite a stronger performance over the third quarter.

Both Madrid and Rome are held back by difficult coalition decision-making, a fear of adverse market reaction to fiscal laxity and an antagonistic domestic political debate which precludes a national consensus on how to spend tens of billions of euros to modernise their economies. Yet the risk of long-term divergence within the eurozone only underscores the imperative of swift fiscal stimulus. Such stimulus ought to support not only the faltering recovery, but also aim to boost potential growth in the medium term. Governments should make the most of their drawings from the EU’s forthcoming €750bn recovery fund, which was designed to prevent an uneven return to growth. The European Central Bank’s aggressive interventions in the sovereign debt markets also provide some cover, making it cheaper for member states to borrow.

There has long been a need to couple European largesse with unpalatable reforms, so the strings attached to the recovery fund are familiar enough. Brussels and Frankfurt have acted. Weaker countries should now seize on the extra support available, or risk falling further behind, their inflated debt piles becoming an increasing burden for the bloc to bear. Poisonous politics at a national level needs to be overcome.

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