With the US fiscal cliff averted – or at least postponed – and further encouraging signs from China and some other emerging markets, 2013 has got off to a reasonable start. After growth slowed last year and in 2011, there is a decent chance that many economies will expand at a faster pace during the coming twelve months.
The one place this probably won’t happen is Europe. In years to come, 2012 may be seen as the height of the euro crisis, and ECB President Mario Draghi as the single currency’s saviour. But for all the good work that the ECB has done, the crisis is fundamentally not resolved. Many euro area economies are still struggling with large deficits that need to be brought under control, sometimes alongside shrinking economies and rising joblessness. Even though Angela Merkel now seems to have realised that pushing Greece out of the euro is a bad idea, that doesn’t mean that the euro area economy is suddenly going to bounce back to a world of robust growth.
The bottom line is that Spain, Italy, Portugal and Greece are all still likely to see further declines in national income this year. Ireland might get away with a positive growth number, if it is lucky. Fundamentally, though, because these economies are chopping deficits the support from the public sector will continue to wane. But with domestic private sectors also keeping a very tight grip on their purse strings, not least because banks are still deleveraging, that means that the only positive source of growth for these economies will be external demand – other people buying exports.
In particular, the PIIGS will be hoping for positive (if not chunky) growth in Germany and other ‘core’ euro countries to pull up the region as a whole. But Germany, in turn, is reluctant to provide much direct domestic boost or any fiscal support. Wage growth is starting to pick up in Europe’s largest economy, which should help consumption and imports, but not to a marked degree. Fundamentally, there is little sign of Germany moving away from its export-driven growth model, where it sells machinery and equipment to the rest of the world.
This means that the euro area growth strategy is essentially ‘sell exports to everyone else’. Unfortunately, at the same time other economies are also trying to do the same thing. The reason so many emerging Asian economies peg currencies against the dollar (to a greater or lesser extent) is precisely to help their exports. And the US is also trying to rebalance itself, and be less reliant on imports.
The difference is that, in these economies, other engines of growth look more reliable than in Europe. The Chinese authorities are demonstrating a deftness in managing the economy that Western governments can only look enviously at (there are some advantages to not being a democracy), and Chinese growth probably will rebalance more towards domestic demand this year. In the US, encouraging signs from the housing and jobs markets suggest that the private sector could also provide more impetus to growth in 2013 than it has for several years. In short, while the rest of the world would also like to sell more exports to everyone else, unlike Europe it is not their only source of growth.
Before anyone gets too carried away, I should also point out that the UK is very much part of Europe as far as this analysis is concerned. The much hoped-for rebalancing of the British economy, trumpeted by the Coalition Government in 2010, has conspicuously failed to materialise, despite the UK having its own currency. Investment is still massively down on its 2007 level, and the trade deficit is broadly where it was five years ago. For all the talk, the Coalition does not have a ‘Growth Strategy’ – it simply does not exist. (Aiming to keep yields low does not remotely qualify as a strategy.) Eventually households may start spending again, but that looks set to be a very gradual process. As such, even though we may avoid the worst throes of the debt crisis, the UK is just as dependent on the rest of the world for growth as its peers. Europe will rely on everyone else to bring home the bacon during 2013.