If Aesop was right, Europe may eventually reach the end of recession

You’ve heard about the tortoise and the hare. It’s a fable that has much to say about unequal partners, overconfidence, and perseverance – topics that leaders of the European Union (EU) may ponder when they’re not poking and prodding member states in efforts to provoke structural reform and growth. 

Last year, the head of the European Central Bank (ECB) announced that ECB would do whatever it took to save the euro. Nine months later, Europe still is plodding through recession. During the first three months of this year, gross domestic product in the region declined slightly year-to-year. The European Commission projects the decline will be a bit bigger over the full year (down 0.4 percent). That, however, will be an improvement over 2012’s 0.6 percent contraction. 

The good news, according to The Economist, is current account deficits (the difference between a country’s total imports and its total exports) and primary budget balances (budgets without interest payments included) have improved in many EU countries. In fact, this year it appears the biggest primary budget deficit (about 3.9 percent) belongs to the United Kingdom. Well done us! The bad news is government debt levels remain very high in many EU nations. In May, Peter Praet, a member of the ECB’s executive board, said: 

“…the euro area needs to persevere in fiscal consolidation efforts and reduce steadily the government debt ratio. Despite the important progress on fiscal consolidation, debt ratios have yet failed to stabilize in most euro area countries…The euro area government debt ratio is projected to rise further to above 95% of GDP in 2013 – far above the 60% Maastricht reference value – with debt ratios displaying large differences across countries.” 

Research from the National Bureau of Economic Research has found growth typically slows – by about 1 percent – when a nation’s debt level reaches 90 percent of gross domestic product. If they’re right, growth in the EU probably will be slow overall. Let’s hope it’s steady, too.

 
 
 

Lexington Wealth Management