Green Shoots in the Eurozone: Is it for Real By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

May 20, 2014 | Posted by bobbysrinivasan << back to blog

After a prolonged recession and lukewarm growth the euro zone countries are slowly seeing some green shoots. The OECD’s new economic outlook forecasts economic growth of 1.9 percent in Ireland, 1.1 percent in Portugal, 1.0 percent in Spain and 0.5 percent in Italy in 2014. This is a welcome turn around. These are real expected growth in their GDP of course adjusted for inflation.

The inflation picture in the euro zone countries is somewhat uncomfortable. The threat of deflation is very much contained in it. In the year to March core consumer inflation in Greece, Portugal and Spain were negative. Ireland and Italy managed to have a small positive inflation 0.6 and 0.9 percent respectively. The overall core inflation was 0.7 percent. This in fact is scary. If the ECB decides to increase the interest rate to control the budget deficit, the euro zone may sink into a deflation similar to that of Japan which is still fighting hard to escape from it. Historically gross public debt has always been the problem in the euro zone. Most of the countries had public debts (accumulated deficit) far in excess of 100 percent which needed stern action like the austerity measures. According to OECD projection for 2015, Spanish gross public debt will be 109 percent, Portugal 141 percent, Italian 147 percent and Greek 189 percent. If these countries want to bring their debts lower either the budget must be tighter or both.

Yet another interesting news coming out of the euro zone is the drop in the bond yields. Gone are the days of ridiculously high yield to maturity. This week Irish bond was yielding 2.7 percent, Spanish 2.9 percent, Italian 3 percent, Portugese 3.5 percent. Even the Greek bonds yielded only 6.9 percent.

Thus the data that is emanating out of the euro zone is encouraging. The ball is in the court of the ECB. What steps are they going to take to ensure continuity and speeding up of economic growth? The ECB is right to argue it cannot solve the problems of euro zone on its own. Can it help in pushing up the consumer demand to generate further growth? Can it extend an helping hand to strengthen credit in weaker countries? How about lowering the interest rates for the euro currency pushing into the negative territory? May be they can engage in the asset purchasing program like in the US to provide the liquidity.

Slowdown in the euro zone 20 trillion or so dollar economy will have a telling impact in the global trade. For India with huge trade deficit of 170-180 bln dollars we need a vibrant euro zone market. Let us hope that the green shoots become paddy fields with rich harvest potential.

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