The Eurozone recovery has been lagging behind the US, but the consensus view is that GDP growth will continue to tick up over the next few years, reaching 1.5% in 2016 and continuing up from there, with Eurozone bears warning that the sovereign debt crisis could easily flare up again. But according to Natixis chief economist Patrick Artus even the meager consensus growth projections are overly optimistic.
“We see that the forecasters still expect an economic recovery in 2015-2016. In view of the specific situations of the four largest euro-zone countries, we find it very difficult to believe this scenario will unfold,” writes Artus.
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Germany will grow at around 0.5 percent per year: Artus
Artus starts with Germany, which consensus forecasts put at 1.5% GDP growth and 1.8% in 2016, with the German government and the European Commission predicting 2% growth next year. But Germany has already returned to full employment (about 5%, the lowest level in more than twenty years) so GDP growth is constrained by real potential growth, a combination of population growth and productivity gains, both of which had been trending down before the financial crisis and have only returned to that trendline in recent years. Artus expects German GDP growth to be close to 0.5% for the next few years.
Spanish growth driven by exports within the eurozone
Spain has done an impressive job of turning its economy around since the financial crisis, and Artus doesn’t dispute that growth story, but he sees it as net negative for the Eurozone as a whole because of Spain’s reliance on exports to other EU nations. He also sees a large scale relocation of productive capital to Spain from other EU countries, France and Italy in particular. There is some benefit to the euro-zone as a whole if that capital is being put to better use, but it’s more incremental than Spain’s numbers would suggest on their own.
Italian youth unemployment approaching 50 percent
“France and Italy are faced with a low level of return on capital and a long-term decline in corporate profitability, which discourages investment and perpetuates the decline in production capacity,” writes Artus.
Artus argues that the root cause is that wage growth has outpaced productivity gains for years, as older employees with strong labor protections maintain their relatively high pay while younger workers are forced to accept low paying contract jobs. Without structural reforms in France and Italy, which may not be politically feasible, Artus is skeptical that either country will contribute much to eurozone growth.