The Eurozone’s False Recovery

LONDON – At first glance, the eurozone economy seems like it might finally be on the mend. Stock markets are rallying. Consumer confidence has picked up. Lower oil prices, a cheaper euro, and quantitative easing by the European Central Bank are all expected to boost growth. ECB President Mario Draghi claims that “a sustained recovery is taking hold,” while policymakers in Berlin and Brussels latch onto signs of life in Spain and Ireland as proof that their bitter prescription of fiscal consolidation and structural reforms worked as advertised.

On closer inspection, however, it becomes clear that the improvement is modest, probably temporary, and not the result of the policies promoted by Germany. True, according to some estimates, the eurozone economy may now be growing at an annual rate of 1.6%, up from 0.9% in the year to the fourth quarter of 2014. But that is far slower than in the United States and Britain. With the eurozone economy 2% smaller than it was seven years ago, “recovery” does not feel like the right word – especially as the relief is unlikely to last.

For starters, the one-off boost from lower oil prices is already being unwound. After dropping by more than half between mid-June and mid-January, oil prices in euros have since bounced back by a third, partly owing to the euro’s sharp depreciation, which is making imports generally more expensive. The effect of that on households’ budgets and companies’ costs is hardly cause for celebration.

Policymakers are counting on a more competitive currency to stimulate growth. But they are likely to be disappointed. With eurozone exports increasingly reliant on global supply chains, a cheaper currency provides less of a boost than before. Exporters may also choose to pocket any gains, rather than seek to expand market share.