France has plunged again into recession driven by a rather sharp fall in its external sales. The promising outlook of the second quarter amounted to a short-lived mirage. Italy continued its downward trend and made take some time before escaping from a prolonged freefall. The only good news in the battered southern front came from Spain and Portugal.
The Eurozone as a whole has achieved a meagre 0.1% increase. A most discouraging outcome, distinctly showing how far recovery lies. The Euro’ strength against major world currencies has dented competitiveness as nearly two thirds of EU exports are channelled beyond its boundaries. A convincing evidence that the ECB made the right choice in cutting its discount rate last week.
Yet, the lacklustre performance in foreign trade doesn’t stand as the key hurdle for Europe’ plight. Its main shortcoming lies in the lack of a robust domestic demand. The German attempt to impose on others its own export-led growth model leads to a self-defeating strategy. In the absence of a solid consumption upswing, there can be little hope of invigorating investment, economic activity, job creation and overall confidence. Reversing the current sluggish performance seems out of reach so long as such harsh medicine of income cuts, short-term and bad paid jobs, excessive fiscal austerity, adverse credit conditions and lower than warranted inflation rates is administered.
Countries able to expand their domestic demand should undertake this task, the sooner the better. Germany is well placed to bolster growth by lowering taxes and social contributions, trimming its mini-jobs policy and engaging in a sizeable and badly needed infrastructure investment plan. This move coupled with an active monetary stance implemented by the ECB stands as the best way forward to harness recovery. Mario Draghi and Olli Rehn have good reasons for pressing Germany to shelve its dwarfing strategy for Europe.