The eurozone's nagging problems

By Andrew Walker
Economics correspondent

  • Published
Cars at German factoryImage source, EPA
Image caption,
Germany, where manufacturing is strong, has the lowest unemployment in the eurozone

The eurozone's crisis has passed, at least for now. Greece is not heading for the exit just yet.

But there are plenty of other festering sores around. They are not immediate existential threats to the currency union, but serious problems nonetheless.

Unemployment is painfully high in several countries, economic growth is patchy and unconvincing in some nations and there are eurozone governments with precarious financial positions, though none as bad as Greece.

The painfully obvious issue is unemployment. Across the eurozone as a whole nearly 18 million people are unemployed (according to June figures).

That's 11.1% of the workforce.

And there's a wide variation between countries, which roughly follows the pattern of economic and financial stress.

Germany (you might have guessed) has the lowest unemployment.

Italy, Slovakia, Cyprus and Portugal have unemployment rates close to or above 12%. Spain's figure is 22%.

Serious social problems

Youth unemployment is a particular concern. In Spain it's nearly 50%, more than 40% in Italy, it's 32% in Portugal and even one of the eurozone's core countries, France, has unemployment among young people not far short of one in four.

These are serious social problems. Unemployment also provides a fertile breeding ground for resentment towards the political mainstream and for scepticism about the euro.

Several countries have parties with major reservations about the eurozone that have made big electoral gains. In Finland, Perussuomalaiset or the Finns, is in the governing coalition.

Government debt burdens are fairly high. It's more than 130% of annual national income or GDP in Italy and Portugal and in excess of 100% in Ireland, Belgium and Cyprus.

Image source, Reuters
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Spain is undergoing a painful adjustment plan and unemployment is high

Sluggish economic growth is the reason that high debts persist even though the extent of fresh borrowing has come down.

Many eurozone countries are forecast by the IMF to see their economies grow by less than 2% this year and next. That makes it much harder to generate the tax revenue needed to make a dent in the debt burden.

Spain and Ireland are exceptions. Both are seen as poster children for knuckling down and getting on with painful adjustment.

The Irish government has drastically reduced its annual borrowing needs, to an expected 2.4% of GDP this year. As growth has resumed that has enabled Ireland to start reducing the burden of accumulated debt.

Unemployment is lower in Ireland. The level is still fairly high and many did emigrate in search of work. But there has also been an improvement in the numbers who do have work, an increase of 6% from the low point in 2012.

France's problem

Two really big eurozone economies are possible serious problems in the future. Italy is the obvious one.

It's the region's third largest economy with a big debt burden and dismal economic growth. GDP is still 9% below the pre-crisis peak, at about the same level it was at the turn of the century.

And then there is France. Unemployment is not of Greek or Spanish proportions, but it is a problem. Growth has been sluggish and the government's finances are stretched. Annual borrowing needs and total debt are both relatively high.

France has a very large state sector. As a proportion of GDP (55% last year) it is the largest in the eurozone apart from Finland.

Critics say such a large state inevitably bears down on the private sector. It certainly makes it hard to pay all the bills from tax revenue.

Image source, AFP
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Urban gardens have sprung up in Spanish cities, often tended by unemployed people

The French government's finances have been in deficit since the 1970s.

Having said all that, France and Italy have government borrowing costs that are eminently affordable.

For France that was the case throughout the eurozone crisis.

Italy had a very turbulent time especially in 2011 and the pressure in the financial markets was one of the factors behind Silvio Berlusconi's resignation as prime minister.

Quantitative easing

Now, however, that pressure has gone, thanks in large part to the European Central Bank (ECB).

Under its quantitative easing programme it is buying eurozone government debt - Italy's included - which is bearing down on the interest rates governments have to pay.

The ECB has also promised to buy more, focusing on countries in difficulty if some governments were to find their borrowing costs driven to unaffordable levels because of fears they might exit the eurozone.

Sub-par growth is a theme underlying many of the region's problems.

Image source, Reuters
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ECB President Mario Draghi has argued for further eurozone efforts to boost growth

The response includes an attempt to make markets work more effectively.

This approach is strongly supported by Germany following labour market reforms there in the 2000s which are often credited for the country's low unemployment and relatively strong growth.

The general objective of this reform agenda is to make it easier for companies to invest, expand and hire workers, boosting growth.

Specific recommendations by the IMF vary from country to country and cover a number of areas, including unemployment benefits, childcare (to help more women into work), court procedures, collective bargaining and regulated professions.

Ageing populations

In May, ECB President Mario Draghi argued that further reforms could boost eurozone growth potential and increase resilience in the face of future shocks.

The stark fact about the eurozone is that the economy for the whole area is still smaller than it was at the start of 2008.

The crisis countries are all still below 2008 levels. But among the others, so is Finland, by a large margin.

The Netherlands finally recovered the lost ground only at the start of this year.

Many eurozone countries, including Germany, will also have to deal with the economic consequences of ageing populations.

The eurozone is no longer in immediate danger, but it is a long way from being in rude health.