The euro area managed to eke out a 0.2% growth rate in Q3, matching the previous quarter
T he solid growth in Germany and France (at 0.5% and 0.4%, QoQ respectively) seems to be the only remaining driver of the struggling euro area economy, according to Eurostat’s flash figures for Q3 GDP growth. Growth in Spain came to a standstill, while the Portuguese economy continued to contract. Going forward, the downward trending confidence indicators and PMIs suggest that the entire euro area is headed towards a recession. Also, additional fiscal drag and the prospect of raising bank solvency ratios by shrinking assets will not bode well for the European economy.
A worrying implication of the lack of growth is that the periphery countries will find it harder to reach their deficit targets by implementing austerity programs. This possibility of worsening debt dynamics will make markets even more wary about the current efforts to deal with the European crisis. Indeed, widening French, Italian and Spanish spreads already highlight the dangers of indecisive action and political turbulence.
Bottom line: The looming recession makes it ever more pressing for euro area policymakers to bolster their efforts, but also limits their ability to rely on fiscal belt-tightening to restore confidence. We maintain that growth oriented policy changes and more aggressive action by the ECB are required to resolve Europe’s crisis.