Summertime- but the ice bucket is empty

Source: Mr G M Mangion¸  PKF Malta  

As published on the 18th of August on Sunday Independent 


With mid- summer blues one expects that the worries about the stagnant economies of Eurozone can be over and recovery which has been elusive finally creeps in. On the surface the waters appear calm such that ostensibly at the first glance¸ everything seems fine. Viewing the tabloids and you see no major turbulences buffeting the financial markets and surrealistically one may almost say that the markets seem to be finding a belated stability. The panic that many experts feared after the downgrading of euro-zone countries last year by rating agencies Standards & Poor’s has failed to materialise. It is surprising but notwithstanding the downgrade investors keep on buying Italian¸ Spanish and French government bonds. But the calm is deceptive and there is a caveat somewhere.

Let us revisit the progress (if any) registered by the first three rescued euro-zone countries—Greece in the spring of 2010¸ Ireland at the end of that year and Portugal in mid-2011. It is encouraging o observe that Ireland has seen quality improvements and as can be seen by  its resilient economy looks set to be the first to triumph as a reformed economy possibly by mid next year. Not so for the other two countries as they are still trying to savour the austerity cure prescribed by the Iron Lady in Berlin. Still there is a whiff of hope that Europe is scraping the bottom of the barrel and quoting Eurostat it heralds the aspiring news that its gross domestic product grew 0.3 percent in the second quarter. A swallow does not make a summer but one can thank Heavens that it is the first positive GDP reading for Europe since the third quarter of 2011 and ushers an end to an 18-month recession that broke the eurozone record. So can we uncork the champagne? Not so quickly as the recovery is fragile and after all one cannot simply judge slight improvements in GDP as a harbinger of good tidings. Can we agree that the German austerity works and the patient is on the mend? While the second quarter expansion was modestly better than expected¸ the Eurozone still faces a tough job developing recovery momentum and rightly so sceptics tell us that on its own GDP growth is not a complete indicator as it says nothing about the quality of growth¸ future productivity or the happiness and well-being of its citizens. It ignores hidden economic activity and income inequality as recently commented by Zachary Pandl a Columbia Management interest-rate strategist. The rule thumb of calling two or more quarters of negative GDP a recession doesn’t make much sense in real life and one may prefer the definition of a recession as pronounced by the US National Bureau of Economic Research¸ as “a significant decline in economic activity spread across the economy¸ lasting more than a few months¸ normally visible in real GDP¸ real income¸ employment¸ industrial production¸ and wholesale-retail sales.”

Using this definition makes more sense and posits another question whether the temporary improvement in GDP is in fact sustainable as really and truly none of Europe’s underlying problems have been solved. Austerity is still the law of the land throughout much of the eurozone¸ particularly in countries that have gone to “Troika “asking for bailout money. But what does this political back drop mean for the