Turning the corner

Euro zone enjoys rays of economic light

The fourth quarter of 2012 was not good for the Euro zone economy. GDP declined by 0.6 per cent. And, there has been more bad news since then. January car sales fell to a 20-year low and the French government announced it will miss its already meagre 0.8 per cent GDP growth forecast in 2013. It’s easy to fall prey to despair. That would be a mistake.

Germany is looking particularly healthy. Last quarter’s hefty GDP decline will soon be forgotten, as Tuesday’s increase of the ZEW economic indicator underscores. Economic optimism among investors and analysts is the highest in three years. The Ifo index, which measures businessmen’s sentiment, has been rising since November.

After three consecutive increases in Germany’s two most reliable leading indicators, even notorious sceptics are becoming less pessimistic. Doubters still talk of a gentle U, but optimists can make a case for a sharper V-shaped recovery. Either way, the rest of the Euro zone will benefit from its biggest economy’s return to growth.

Moreover, good news is coming not only from the currency area’s strong point, but also from its weakest link. Greece is making palpable progress in sorting out structural problems and increasing competitiveness. The current account deficit fell by three quarters in 2012, reaching the lowest level since 1999. True, a brutal recession weighs heavily on import demand, but structural improvements have also been an important driver of the adjustment, as even the dour German central bank acknowledges.

Euro zone financial tensions are also dwindling. Target 2 balances, the cross-border accounts of the Euro zone’s national central banks, had risen sharply as lenders pulled back from troubled members. These balances are now falling steadily.

Many things could still go wrong. The most immediate is a return to power of Silvio Berlusconi in Italy after this weekend’s elections. Other Europeans leaders consider him an unreliable partner. But Europe’s recent history suggests that the nightmare scenario will be avoided. Voters in countries from the Netherlands to Cyprus have consistently been euro-friendly. If Italians stick to that tradition, the Euro zone’s news is likely to get steadily better.