The good news for the Eurozone in the first two quarters of 2013 was that things did not get worse. The bad news was that they did not get better. Currently, the divisions in the Eurozone are not only between relatively well-performing countries and countries in deep recession, but also between financial market sentiment and the real economy. Investors continue to trust the safety net of the European Central Bank, but the fairly optimistic views in the financial markets do not spill over to the real economy, at least not yet. The recession in the Eurozone continued in the first quarter and very likely also in the second. This means that the Eurozone has been in recession for more than six quarters now, the longest recession in its 14-year history.
Where can growth come from?
A return to growth in the Eurozone naturally requires growth in the main GDP components: private consumption, government expenditure, investments, and net exports.
Private consumption trends in the Eurozone, the subject of a separate article in this issue, are not favorable. Private consumption remains suppressed as household deleveraging has been ongoing and disposable income falling.
Governments in the Eurozone, on the other hand, mostly do not have the capacity to increase expenditure. Governments in the crisis countries are in the process of repairing their balance sheets, with no room to increase expenditure. Meanwhile, the northern European countries are reluctant to increase expenditure substantially, not least because the fiscal brake prevents higher deficits, and the northern European governments are already above the debt limits of the Maastricht Treaty.
Investment activity in the Eurozone has been extremely weak. Since 2007, private investments have fallen from 21.8 percent of GDP to currently 18 percent.1 This investment gap seems unlikely to be closed in the near future. Even in Germany, firms remain reluctant to invest. The latest Deloitte CFO Survey indicated that an increase in investments is very low on the agenda of big German companies compared to other strategic activities such as cost cutting or increasing cash flow. In addition, the investments that are planned are defensive in nature and focus on rationalization rather than on growth (figure 1).
Figure 1. Investment plans of German firms for the next 12 months
This means that three out of four GDP components fail to contribute to growth. Therefore, the hopes for growth in the short term hinge critically on exports. However, there are profound changes underway in the Eurozone’s export sector that will have an impact on the likely success of an overwhelmingly export- oriented strategy.
The Eurozone’s changing export structure
The Eurozone is a highly export-oriented economy. Very open economies such as the Netherlands export more than 70 percent of their GDP. After the financial crisis in 2009, which implied a deep slump in exports, the Eurozone’s exports recovered and have been growing quite strongly, at 7.9 percent on average from 2010 to 2013 according to Eurostat. The trade balance is strongly positive and, according to projections of the EU Commission, will amount to € 196 billion in 2013. Germany runs by far the biggest surplus (€194 billion), followed by the Netherlands (€53 billion) and Ireland (€45 billion).2
The export structure of the Eurozone is changing substantially, especially in terms of destinations. While intra- and extra-Eurozone exports grew roughly at the same pace before the crisis, this has been changing since then. Exports outside the Eurozone have been growing much faster, and the growth gap between intra- and extra-Eurozone exports has been widening (see figure 2). In 2012, intra-EU exports stagnated, while extra-EU exports grew by 9 percent.
Figure 2. Growth in intra- and extra-Eurozone exports (%)
New export destinations
The fastest-growing export destinations are the BRIC countries, which account for the bulk of the growth. After the financial crisis, Eurozone exports to the BRIC countries grew by more than 20 percent annually (figure 3).
Not surprisingly, China has seen the biggest increases in Eurozone exports. Especially for German firms, China has become a market of crucial importance. Data and projections of the German Council of Economic Experts show that China increased its share in German foreign trade from 2 percent in 1993 to 6 percent in 2010, and it will further increase it to 9 percent in 2016. This would imply that Germany will export more to China than to the United States in 2016, and that China will be very close to France, the second-most important market for German firms.3
Exports to China and emerging markets in general are one crucial factor that explains a good deal about German economic performance, and why such an export-driven economy as Germany could prosper despite the recession in the Eurozone. Between 2008 and 2011, the latest year for which data are available, Germany could increase its exports to China from €49 billion to €91 billion. The difference in growth rates in relation to the other Eurozone countries is huge. The rest of the Eurozone could increase it exports to China from a similar level (€47 billion) to only €66 billion, less than half as much.
So far, it seems that the German economy, in particular, has benefitted from the rise of the emerging markets and especially China. To achieve large-scale recovery, however, the Eurozone as a whole needs to strengthen its footprint in emerging markets to generate the export growth it needs. While there are encouraging signs that rising price competitiveness in the Eurozone can support higher exports—Spain is a good example—it remains to be seen whether the strategy can work for the Eurozone as a whole.
The reliance on export performance to escape the recession makes the Eurozone very dependent on developments in the rest of the world, especially emerging markets. This might turn out to be a successful strategy, but it requires constant growth in the emerging markets, which cannot be taken for granted (see the article on China in this issue). An export-led recovery makes sense for the open Eurozone economies, but putting all the eggs only in the export basket makes the Eurozone vulnerable. A more balanced strategy that also focuses, for example, on jumpstarting investments in the Eurozone might be less risky.
- Austrian Economic Chambers, “Investment Rates,” May 2013, http://wko.at/statistik/eu/europa-investitionsquoten.pdf, accessed July 5, 2013.
- Austrian Economic Chambers, “Exports/Imports,” May 2013, http://wko.at/statistik/eu/europa-exporteimporte.pdf, accessed July 5, 2013.
- German Council of Economic Experts, Annual Report, 2011, http://www.sachverstaendigenrat-wirtschaft.de/aktuellesjahrsgutachten0.html?&L=1, accessed July 5, 2013.