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August 11, 2014

PIIGS return to growth

  • The Eurozone economy will finally return to annual growth in 2014, with a forecast for expansion of 1.1% over the year. The gap in performance between the currency bloc’s “core” and its “periphery” is also expected to narrow, with all five of the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) making a recovery this year.
  • Growth should pick up further pace in the outer years as the continent – and especially the hardest-hit economies of the South – recovers from a low base, leading to an overall real GDP expansion of 7.8% between 2014 and 2019.
  • While this reverses the damage done between 2008 and 2013, when output in the Eurozone shrank by 2.0%, mixed realities persist at the national level.
  • In Germany, GDP per capita recovered to pre-crisis levels during 2010. By contrast, Cebr’s forecasts see GDP per capita in Greece, Spain, and Ireland remaining below pre-crisis levels until at least 2019. France and Ireland lie in the middle, with GDP per capita expected to return to pre-crisis peaks by 2017 and 2018 respectively.
  • The measure of GDP per capita will likely overstate the path of living standards in the periphery, as growth there is driven by exports and foreign investment, while consumption is stagnant.
  • The legacy of the recession will thus be felt more deeply domestically, in the form of high unemployment, reduced living standards, and a sense of strife and fatigue in the political system.
  • From a policy perspective, while a break-up of the union is off the cards for now, the persistence of imbalances among Eurozone economies is expected to challenge the cohesion of the union and create difficulties for Brussels and Frankfurt further down the line. 

The Eurozone’s fragile recovery continues on a slow yet steady path. Even though the short term outlook is still a bit patchy (as shown by the recent poor Italian and general European data), Cebr’s latest economic forecasts see all five of the PIIGS of the currency area’s so-called periphery (Portugal, Italy, Ireland, Greece, and Spain) returning to positive growth this year after long recessions. Growth in these economies is expected to be heavily driven by exports and investment from abroad. A more benign global economic backdrop mainly aided by the recoveries seen in the US and the UK, but also the rest of the Eurozone, should support strong exports from the periphery. In contrast, Eurozone economies whose export structures leave them more exposed to the slowdown in emerging economies, such as Germany, are forecast to do less well on the export front. As for foreign investment, the periphery economies have made very significant economic adjustments in recent years and are now in a much better position than when the crisis hit, offering great opportunities to prospective investors. Their economies – especially in those countries that engaged in bailout agreements that came with “strings attached” for structural reforms – have undertaken impressive structural transformations, particularly in terms of liberalising labour market regulation, reducing bureaucracy, and accelerating a process of privatisation in an effort to reduce the public balance sheet. This has left them in theory in a much improved competitive position, which – if properly exploited – should allow them to reap the opportunities of a general improvement in the global economic climate. Looking ahead, Cebr expects growth in the Eurozone’s periphery to accelerate even further in the outer years, as these recover from a very low base.
 
This will be an extraordinary turnaround. Over the period 2008-2013, the Eurozone as a whole contracted by 2.0%. Out of this, -2.9 percentage points were contributed by the PIIGS, with Germany slightly offsetting the aggregate figure by contributing +0.9 percentage points.  In sharp contrast, over the coming five years the PIIGS will make a strong comeback, contributing over a quarter of Eurozone’s growth of 7.8% between 2014 and 2019.
 
While the return to growth, even for the periphery, makes for headlines of an overall rosy picture, the recovery in these economies will be too slow to heal the deep scars of the recession. Even though exports have started to generally pick up, domestic consumption remains subdued, and therefore there are still uncertainties ahead as to the speed of the recovery in the short to medium term. What’s more, the legacy of the financial crisis in these economies will haunt them for years to come in the form of high unemployment, reduced productive capacity through foregone investment, reform fatigue, and political fragmentation. GDP per capita in all five of the PIIGS still remains well below its pre-crisis peak, and Cebr’s forecasts see it failing to fully recover by the end of our forecast period in Greece, Spain, Italy, and Ireland.
 
Other EU states, meanwhile, have weathered the crisis relatively well. By the end of 2014 Cebr expects that GDP per capita in Germany will be 7.5% higher in real terms than in 2007. The French economy as a whole recovered to pre-crisis levels in 2011, but output per capita is only forecast to reach pre-crisis levels in 2017. Significant challenges lie ahead for the French economy in terms of consolidating its public finances, improving damaged competitiveness, and reducing high structural unemployment.
 
This patchwork of economic circumstances across the Eurozone underpins the political fragmentation taking place across the currency area, evident in the results of the European elections in May. Political fragmentation and the continued rise of extreme parties would prove a challenge to the push for reforms in Brussels and Frankfurt, and a threat to the cohesion of the union.
 
Danae Kyriakopoulou, Cebr Economist and main author of the report, said: “The Eurozone’s periphery economies are heading for a dynamic comeback this year, and are forecast to be an important driver of growth for the currency area going forward. However, one should be wary of a premature sense of “mission accomplished”. GDP per capita still stands well below pre-crisis peaks in the periphery and even in France and the United Kingdom, and is forecast to remain there throughout the forecast period in Spain, Italy, Greece, and Ireland, despite strong growth. The PIIGS still have a lot of reforms to undertake and complacency now could be disastrous for their future.”
 
Vicky Pryce, CEBR’s Chief Economic Adviser added:  “The debt overhang, which still plagues many of the PIIGS, will act as a constraint to growth. As a result, a return to pre-crisis levels for the periphery economies such as Greece may take more than a decade to be realised, with huge losses in skills and other productive infrastructure in the meantime.”

 

Table 1: Real European output growth per capita, 2008-2013 and 2014-2019

2008-2013 2014-2019
Greece -23.8% +15.0%
Ireland -11.2% +11.3%
Spain -10.1% +4.6%
Italy -9.2% +4.6%
Portugal -7.0% +8.2%
UK -3.4% +7.7%
France -1.9% +4.9%
Germany +4.2% +9.2%

Source: IMF, Cebr analysis

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