Europe's Recovery Not Dead Yet
The headlines this morning are all agog about Europe. “ECB's Praet: All Options on Table: Central Bank Could Adopt Negative Deposit Rate, Asset Purchases If Needed," said the WSJ. “Europe Recovery Wanes as Germany Slows, France Contracts” was the Bloomberg hed. The FT’s Martin Wolf wrote, "Why Draghi was right to cut rate.” And the big one at the Journal, “Euro-Zone Recovery Falters.”
Please calm down about Europe.
Perhaps it's my bias -- my clients own Vanguard’s European ETF (VGK) -- but most of you folks now breathlessly declaring Europe’s recovery already over had left them for dead six months ago.
You were wrong then, and you are likely wrong now.
France and Italy are effectively flat. Minus-0.1percent is not all that statistically meaningful. Neither are Spain and Portugal, at plus-0.1 percent and 0.2 percent respectively. But this is an enormous improvement from when these countries were in economic free-fall, with double-digit contractions in employment and gross domestic product. Often when data series bottom and reverse, there is a surge, which subsequently subsides. Slow growth in Europe of 0.5 percent to 1.5 percent might be what they are in for the next quarter or 3.
This is the simple reality about post-credit crisis recoveries: They are slow and often halting. In the U.S., where we seem to be about 3 to 4 years ahead of the continent in recovering from the Great Recession, we have been growing barely above stall speed at 2 percent to 3 percent. And as much austerity as there has been in state and local spending here, and essentially flat Federal spending growth, we are far better off than the self-inflicted wound the Europeans imposed on themselves with deep austerity in specific countries as a condition precedent to receiving aid.
Those on the other side of the pond will eventually figure their way through this. They have made a few policy mistakes, but then again, haven’t we all?
While plenty of risks still remain for the EU-area economy, it is way too soon to write off its nascent recovery. And if the Europeans -- heaven forbid -- engage in intelligent fiscal stimulus, they could even leapfrog the slow growth here in the U.S.
Stranger things have happened.