Who Will Take the Lead on Eurozone Growth?

 

While recent data suggest that the countries of the Eurozone have stabilized from their austerity-induced recession, the under-capitalized banking system is still in some distress and cannot provide the credit growth necessary for a meaningful rebound in economic activity.  This analysis places the emphasis on European Union (EU) wide banking reform as one of the primary keys to future economic growth in the region.  The challenge that seems to be emerging, though, is that Europe is appearing leaderless.

At the Global Financial Leadership Conference (GFLC) now being held in Naples, Florida, Lorenzo Bini Smaghi a former member of the European Central Bank’s board, argued that Germany was the country best positioned to take the lead within Europe.  By contrast, Jurgen Stark, also a former member of the European Central Bank’s board, took the position that Germany could be a partner with other countries to lead the way to EU banking reforms.  Stark noted that Germany would never leave the Euro, it also would not lead the EU, at least alone.

The leadership situation in Europe is complicated in the short-term by the inability of Chancellor Merkel to form a coalition government.  Chancellor Merkel’s party won a decisive plurality of the vote in the September 2013 elections, but they did not win enough seats to control a majority of the parliament.  And the negotiations with the main opposition party have so far failed to produce any agreement.

The leadership situation is further complicated in the long-term by the lack of a suitable country to partner with Germany to lead the EU.  France would be the typical choice, and in the past the German-French partnership has been able to make considerable progress in dealing with EU issues.  In the current context, however, President Hollande of France is quite unpopular, and the French economy appears to be sliding back into recession.  Indeed, there are worries that the French economy is more likely to go the way of Spain and Italy than to emulate Germany’s relative success.

With the lack of strong and willing leadership in the EU, the burden of lifting the EU out of recession falls to the European Central Bank.  Looking in from the outside, former UK Prime Minister Gordon Brown, also speaking at the GFLC conference and on the panel, noted that central banks in general, not just the European Central Bank are being asked to do too much. Smaghi noted that central banks can buy time, which takes some of the pressure off politicians, but if the politicians waste the time, then the economic situation is not helped.

All in all, our own perspective is that the outlook for economic progress in Europe remains quite pessimistic.  The ECB has probably done all it can to buy time for the Eurozone countries to act on EU banking reform.  Without a country to lead Europe, and Germany cannot lead even if it wanted to until Chancellor Merkel forms a coalition government, the Eurozone countries are left with a no growth scenario as the most likely prognosis for 2014.

 

Bluford (Blu) Putnam has served as Managing Director and Chief Economist of CME Group since May 2011. He is responsible for leading economic analysis on global financial markets by identifying emerging trends, evaluating economic factors and forecasting their impact. Prior to joining CME Group, Putnam gained more than 35 years of experience in the financial services industry with concentrations in central banking, investment research and portfolio management. He has authored five books on international finance.

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