18, 2013 4:50 pm
Europe needs new fables as Dutch and Portuguese go off-script
Crises’ roots lie in domestic credit regulation, not eurozone capital imbalances, says Martin Sandbu
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Pay close attention to the European economic figures that came out last week, and look behind the headline news that the eurozone as a whole is out of recession. Your reward will be a tale of two countries that shows how stubbornly Europe’s economy is ignoring the script from which its politicians have been preaching.
Throughout the euro era, Portugal has had large budget deficits, hitting double digits as a share of annual output at the height of the crisis. The country did not even enjoy the unsustainable boom that got Greece, Spain, and Ireland into trouble. The Portuguese economy only shuffled through the euro’s first decade. It is now nursing a bad hangover without ever having been to the party.
According to the morality play guiding the European Commission and the creditor economies that steer eurozone policy, the Dutch will be rewarded with economic success and Portugal condemned to financial purgatory until cleansed of its sins. The alternative fable told by sceptics of monetary union says these nations should never have shared a currency, and their different prospects are as ineluctable as the permanent north-south transfers that will be needed to keep the euro together.
And so things have looked until recently. But Europe’s economy is more complex than the stories admit. As if it wanted to make a point, it has begun to go off-message.
In the second quarter, Portugal grew at an annualised rate of 4.5 per cent – the fastest of any EU country. The Netherlands kept shrinking, by 0.2 per cent in the last quarter (0.8 per cent on an annualised basis).
One should be careful to draw firm lessons from one quarter’s data. Portugal’s growth spurt no doubt reflects one-off factors more than a change of trend. Still, the contrast serves to illustrate how impoverished the most common stories told about the eurozone really are.
Against those who preach fiscal discipline above all else, the Dutch recession shows that neither solid public finances nor (this is even less commonly appreciated) large current account surpluses are sufficient to prevent credit bubbles that bring the economy down when they burst. The Dutch are suffering the consequences of an entirely self-inflicted housing bubble. The household debt-to-income ratio is 250 per cent.
House prices have fallen by 21 per cent. This makes overstretched homeowners – 30 per cent owe more than their house is worth – consume less. Add public deficit cuts, which the Dutch imposed on themselves in their enthusiasm for a fiscal compact to bind the Portuguese and others, and a depressed economy is the unavoidable consequence.
The bright side of this is that the euro is not as flawed as all that. Asymmetric capital flows are not incompatible with healthy economies – private sector lending from richer economies to poorer ones is to be desired – but such credit must fund productive investment. That requires better banks. After trying everything else first, eurozone leaders are finally starting to address the real problem.
Copyright The Financial Times Limited 2013.
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