The current state of the Eurozone economy and its perspectives

Written by: Alistair Cotton, Corporate Dealer at Currencies Direct

The European Central Bank has played a key role in stabilising the Eurozone while member states attempt to implement major economic reforms. These include challenging tasks such as banking union, mutualised debt, fiscal union and structural and labour market reforms. The reforms are likely to take over five years to complete and during this time Europe is expected to be to be stuck in low growth mode.

While the new European Commission president Jean-Claude Juncker is clearly grateful for the work ECB president Mario Draghi has done to ‘save the Euro’, Juncker is undoubtedly worried about a rise in the value of the euro and the negative effect a strong European currency is having on EU exports and future growth.

Airbus, which incurs costs in euros but sells its planes in dollars – even within the Eurozone – is one of several groups to be adversely affected by a strong euro, and has recently called for the currency to be devalued from around $1.36 to $1.25 or $1.20. Similarly, French finance minister Michel Sapin has called for a variety of currencies to be used for international transactions, given the handicap for the Eurozone of dealing in dollars.

The strong euro doesn’t just affect manufacturers or other exporters. The weaker southern states would all benefit from a weaker euro to encourage tourists. The north-south divide remains, although it is narrowing, and the southern states face a long road back.

While yield-hungry investors may now be flocking back to Greek, Portuguese and Spanish markets, recovery is not yet assured as underlined by recent fluctuations in the Portuguese market. ‘Serious accounting irregularities’ in Portugal’s largest bank sent shock waves thought-out the Eurozone and beyond, highlighting wider fears that the economic recovery in the Eurozone might be already be stalling.

But the strength of the euro is only one issue affecting the Eurozone. One of the principal and most notable features of the rapid economic growth during the early 2000s was the sharp rise in the unit cost of labour, especially in the Southern periphery of the Eurozone compared to Germany. The lack of price competitiveness relative to the North led to rising debt with many European countries unable to compete in a global market.The long-term health of Eurozone depends on Germany raising its unit labour costs and other European member states decreasing theirs to restore balance within member countries. This now seems to be happening; in 2013 employers in Germany spent 34 percent more per employee than the average in Europe as a whole. German companies spent on average 31.70 euros ($43.61) per hour worked last year1 while mean labour costs in the EU were 23.70 euros. Thanks to the above-average productivity2 of workers in the country many believe Germany will remain competitive despite higher labour costs. While this is encouraging the convergence of unit labour costs across the Eurozone has still some way to go.




1 https://www.destatis.de/EN/Homepage.html
2 http://stats.oecd.org/Index.aspx?DataSetCode=PDB_LV