A return to expansion in France and Italy helped boost eurozone economic growth in the first three months of 2015 to its fastest pace in almost two years, raising hopes that recovery is finally broadening in long-stagnant Europe, reports The Wall Street Journal.
However, a stumble in growth in Germany - the eurozone’s largest economy and the region’s engine of growth in recent quarters - highlighted the fragility of the recovery.
At the same time, policy makers are urging that France and Italy, the eurozone’s No. 2 and No. 3 economies, exploit the recovery to push harder on reforms. Indeed, the European Union criticized France, Italy and three other countries on Wednesday for a variety of economic failings, including rigid labor markets and lagging competitiveness, as part of annual recommendations to national authorities.
For the first time since the first half of 2010, all four of the eurozone’s largest economies recorded growth, while Spain, which released figures earlier, is leading the recovery with a 0.9% growth rate. And for the first time since the first quarter of 2011, the currency area’s economy grew more rapidly than both the US. and the UK.
Faster and more evenly spread growth will feed hopes that 2015 could mark a turning point in the eurozone’s efforts to recover from its debt crisis, boosted by an extraordinarily favorable mix of fresh stimulus from the European Central Bank, a sharply weaker euro, and lower oil prices.
However, policy makers worry that the recovery will remain rather weak and could even sputter when the ECB takes its foot off the gas if major countries—particularly France and Italy—don’t dig deeper into economic reforms.
“When you deal with structural problems, it takes time,” for economic results to show, Yoram Gutgeld, a senior economic adviser to Italian Premier Matteo Renzi, said recently.
Continued problems in Greece could weigh on the region. The country fell back into recession, showing how the confrontation between the Athens government and its creditors and uncertainty over the country’s solvency and euro membership are taking their toll on its economy. Greek gross domestic product fell by a seasonally adjusted 0.2% in the first quarter, following a 0.4% contraction in the fourth quarter. A recession in Europe is commonly defined as two or more successive quarterly contractions.
The combined GDP of the 19 eurozone countries was 0.4% higher in the first quarter than in the final three months of 2014, EU statistics showed on Wednesday. That marked a pickup from the 0.3% pace of the final quarter of last year, but was slightly weaker than the 0.5% forecast by many economists. On an annualized basis, the economy grew 1.6%.
However, a hiccup in Germany’s growth—GDP slowed more sharply than expected, with 0.3% growth compared with 0.7% in the previous period—raised concerns about how sustainable the region’s recovery will be. Wage increases and cheaper oil pushed German households to spend, but weaker demand in the U.S. and parts of Asia for German exports put a damper on the expansion. Economists at Barclays cut their full-year 2015 GDP projection to 1.5% from 1.8% following disappointing first-quarter GDP data.
“Investment growth in Germany is too weak and certainly does not reflect buoyant expectations for around 2% GDP growth this year,” said Olaf Wortmann, an economist at the VDMA engineering federation, which represents more than 3,000 Mittelstand companies.
And despite a return to growth, the pressure remains high on Italy and France—which together make up nearly 40% of the eurozone’s GDP—to enact radical reforms quickly enough to improve their growth potential and better pull their weight in the eurozone. French and Italian GDP first-quarter figures exceeded expectations, growing 0.6% and 0.3% respectively, having stagnated in the previous period.
For leaders of both countries, the figures are a relief. In Italy, the positive figure, while modest and the weakest of the big Eurozone economies, was the highest in four years. In France, Finance Minister Michel Sapin struck an unusually confident tone on Wednesday, saying that he expected the French economy to grow at least 1% this year and 1.5% in 2016.
French President François Hollande and Mr. Renzi have been locked in pitched battles to overhaul their economies. Both have cut taxes, loosened labor laws and reduced red tape—sometimes invoking confidence votes or special powers to push change through parliament.