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Three Reasons Why The Eurozone Recovery Will Be Poor

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Duur van deze podcast is 6:15 min.

De eerste publicatie was op 3 mei.

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The Eurozone economy is expected to collapse in 2020. In countries like Spain and Italy, the decline, more than 9%, will likely be much larger then emerging market economies. However, the key is to understand how and when will the eurozone economies recover.

There are three reasons why we should be concerned:

1. The eurozone was already in a severe slowdown in 2019. Despite massive fiscal and monetary stimulus, negative rates, and the ECB balance sheet above 40% of GDP, France and Italy showed stagnation in the fourth quarter and Germany narrowly escaped recession. The eurozone weakness started already in 2017 and disappointing economic figures continued throughout the next years. Many governments blamed the weakness on the Brexit and Trade War cards, but it was significantly more structural. The eurozone abandoned all structural reforms in 2014 when the ECB started its quantitative easing program (QE) and expanded the balance sheet to record-levels. Manufacturing PMIs were already in contraction, government spending remained too high and the elevated tax wedge weighed on growth and jobs. In 2019, almost 22% of the eurozone GDP gross added value came from Travel & Leisure, a sector that will unlikely come back anytime soon, while the exporting sector is also likely to suffer a prolonged weakness.
2. The banking sector is still weak. In the eurozone, 80% of the real economy is financed via the banking channel (compared to less than 15% in the United States). Eurozone banks still have more than 600 billion euro in non-performing loans (3.3% of total assets vs 1% in the U.S.), an almost unprofitable business with a poor return on tangible assets (ROTE) due to negative rates, and a significant challenge ahead, as most of the growth investments, in LatAm in particular, may reduce capital strength significantly in the next months. Most of the eurozone governments are relying on leveraging the banks’ balance sheets in their “recovery plans”. A massive increase in loans, even with some form of state guarantee, is likely to cause significant strains on lending capacity and solvency in the next years, even with massive TLTROs and capital requirement reductions.
3. Most of the recovery plans go to government current spending, and tax increases will surely impact growth and jobs. The eurozone tax wedge on jobs and investment is already very high. According to the Paying Taxes 2019 report, the majority of eurozone economies show widely uncompetitive taxation levels. As most governments will massively increase deficits to combat the Covid-19 crisis, there is a high likelihood of a massive increase in taxes that will make it more difficult to attract investment growth and jobs. Most of the recovery plans are also aimed at bailing out the past and letting the future die. There are massive bailout packages for traditional conglomerates and industries, but investment in technology and R&D continues to have high burdens and no support. Considering that the eurozone was already in contraction in the middle of the massive Juncker plan (that mobilized more than 400 billion euro in investments) and the large green policies implemented, it is safe to say that relying on a Green New Deal will unlikely boost growth or reduce debt. The main problem of these large investment plans is that they are politically directed and, as such, have a large tendency to fail, as we saw with the Jobs and Growth Plan of 2009.

De verdere analyse in de rest van dit artikel vindt u hier op het Blog van Daniel Lacalle.

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Meer over het Corona-virus (Covid-19), de wijze van aanpak en haar economische gevolgen vindt u hier op Veren of Lood.