Something is stirring in Europe. Unemployment is coming down and growth is picking up. Business confidence is rising amid hopes that a broad-based expansion is at last under way. There are even optimists at the European commission who believe the eurozone will see faster expansion than the UK for the first time since 1995, thus sparing them UK Chancellor of the Exchequer Gordon Brown's homilies on the need for more aggressive reforms.
The next thing we know, a resurrected Britain in Europe will be banging the drum for Britain to join the single currency.
Well, perhaps not. There are certainly, as former chancellor of the exchequer Norman Lamont once said of the UK, plenty of green shoots of recovery across Europe, and in the third quarter of last year the eurozone for once chalked up stronger growth than Britain. What's more, there's good reason to expect what has so far been a pick-up dominated by exports to spread into investment and consumption.
By its own recent standards, the eurozone is set for a pretty good year this year. The problem is that its own recent standards are not high, so the consensus is for growth of around 2 percent, perhaps a bit higher if the world economy continues to hum along.
In the US, growth of 2 percent would be considered really poor and Wall Street would be baying for cuts in interest rates; in the UK, 2 percent would be seen as a soft year, not disastrous but disappointing. There seems to be no reason to quibble with the view of one City analyst who once joked that Iraq would join the euro before Britain did.
That said, there seems little doubt conditions in the eurozone have been improving since the middle of last year. Ian Harwood, head of global economics at Dresdner Kleinwort Wasserstein, compiles what he calls a surprise indicator -- a gauge of whether news is better or worse than expected. The eurozone has been on a definite upwards trend for six months.
Germany, which accounts for a third of eurozone GDP, is a big part of the story, but encouragingly we are not just talking here about exporters taking advantage of strong demand in the US and Asia. The pleasant surprises for Germany have been matched in Italy -- a country that was being identified as a candidate to quit the single currency in the middle of last year.
It is unlikely that the main problem facing Italy -- a chronic lack of competitiveness -- has gone away, but in the short term it has been helped by the weakness of the euro and by lax fiscal policies.
(It might also be said that no news could have come out of Italy last year that would have been worse than expectations priced into the markets.)
In France, unemployment has fallen for the past seven months, while surveys of employment intentions have turned upwards in Italy and the Netherlands, two countries where consumption growth has been especially weak.
It would be wrong to overstate these trends. While eurozone retailers are a lot more optimistic at present than those in Britain -- more cheerful than they have been for five years, in fact -- the surveys have yet to be supported by hard data.
Until now, the reason for the weakness of consumer spending has been easy to identify: real income growth has been weak and, unlike consumers in the US and the UK, people in the eurozone have been reluctant to borrow against a background of high unemployment and threatened welfare cuts.
In theory, a diminishing threat of unemployment should lead to a decline in savings ratios across the eurozone as households feel emboldened to borrow more and this, in turn, should give a boost to consumer spending, thereby making the recovery more broadly balanced.
Underlying conditions in Germany look healthier than for some time. As in the US and Japan, profits as a share of the economy have risen sharply in recent years, and that tends to be a harbinger of rising investment. Moreover, unemployment has started to come down, albeit from high levels.
German unemployment fell by 110,000 last month and, while this was flattered by special schemes and a toughening-up of the criteria for claiming benefit, there are some grounds for thinking the country may be benefiting from the sort of virtuous circle enjoyed by Britain in the late 1990s, with the increase in the employed workforce boosting aggregate demand without stimulating inflationary pressure.
As Harwood notes, the economic confidence survey by German think tank Ifo is well correlated historically to GDP, and is signalling better times ahead.
"The German economy is enjoying a traditional export upswing -- driven by buoyant global growth, improved competitiveness via `self-help' cost-cutting and a trade-weighted euro which has in the past few months been declining year on year. Unsurprisingly, the consensus expectation for German growth in 2006 has begun to move upwards," Ifo said.
There are two big dangers for this rosy scenario in the eurozone: one external and one domestic. One reason consensus forecasts for the eurozone were so downbeat last year was that analysts expected a pronounced fall in the value of the dollar to push up the value of the euro. This was seen as harming growth prospects. As it happened, the dollar remained strong, and that helped Europe's exports.
The early signs for this year are that the dollar bears may be right this year. A massive trade deficit, a slowing housing market and a halt to interest rate increases all point to the greenback coming under pressure on the foreign exchanges. It is quite plausible that during the course of this year the euro may rise to US$1.40; an appreciation of this order would be a painful blow to Europe's exports, particularly against a backdrop of slowing US demand.
In those circumstances, the actions of policy makers in the eurozone will be vital. There is enough recent evidence from Japan to indicate that nascent recoveries can shudder to a halt, and it is crucial that the right lessons are drawn from what has happened to the eurozone over the past few years. It might suit the dogma of the European Central Bank and the European commission to argue that the improvement during the course of last year was the result of structural reforms, but that would be precisely the wrong conclusion to draw.
Macroeconomic conditions have been favorable for growth -- a robust global economy, a falling exchange rate, easy fiscal policies -- and have made for an environment in which supply-side policies have some traction.
Even with all those factors, global competitive conditions and currency movements are likely to put a cap on the eurozone's growth potential this year, and most commentators believe it will do less well next year.
Germany's intention to increase VAT in a year's time represents an obvious threat to consumer spending growth; an even bigger problem would be a trigger-happy central bank which overreacts to a non-existent inflationary danger by aggressively banging up interest rates.
European Central Bank President Jean-Claude Trichet's dovish comments last week suggest he may have got the message: policymakers need to beware of killing off a recovery when it has barely started.
Let's hope so.
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