Saturday 20 January 2018

Rising EU economic tide may help lift political boats

Stock image
Stock image

IT is the economy, stupid - even in Europe. Deep in the forest something is stirring and, if past experience is anything to go by, recovery in Europe will change more than just the GDP figures.

It has been a dark and dismal forest for many EU countries, if not most, since 2007. It's all the more encouraging then to find a shaft of sunlight in the recent surveys of purchasing managers.

These PMIs are regarded as a pretty good indicator of future growth. Remarkably, the readings for France were higher than those for Ireland.

Such slippage as there was came from the manufacturing side, with a reading of 53.6 comparing with the services' 59.1. You will know that any reading above 50 shows that the sector is expanding.

Keep in mind that a fall to any number above 50 simply means that the expansion was less rapid than during the previous survey period.

If Irish manufacturing stays above the 50 cut-off point until June it will have been expanding continuously for four years. That is a long recovery, as well as a strong one.

Managers' answers showed little concern. The gyrations of sterling caused some currency problems. More sales were met from stocks, which reduces growth.

But more than half of those surveyed expect output to increase over the next 12 months, while twice as many reported increased export orders as did not.

And it rather looks as though there will be increased output. When the booming services sector is added to manufacturing, the Investec composite reading comes to 56.9. But that was less than France's 57.6 - itself a stronger reading than Germany's 57.0.

One should not get too hung up on particular numbers, but these figures do seem to point to decent growth in France. These days, even more than it usually does, France matters.

Some might say, the markets seem to have called it right - for once. Expectations about eurozone growth turned upwards at the end of last year and took a significant jump last month.

Those expectations include inflation and involve an increase in interest rates. It is a sign of the strange times we live in that the prospect of dearer money is cheering people up.

Anything seems better than the stagnation of the past 10 years in much of the eurozone.

The cheer may not last. There was a warning last week of the risks facing those on cheap tracker mortgages once rates begin to rise. They have been so low for so long, and general conditions have been so difficult, that it is a fair assumption that many households have little or no disposable income to meet higher borrowing costs.

The same could be said of those not fortunate enough to get trackers but there is that little mathematical trick that a half-point rise in ECB rates is a much bigger increase for someone on a 1pc tracker than a 4pc variable.

Also, the banks will be under pressure to absorb some of the increases on variable rates, given the high margins they charge, and the fact that higher rates will benefit their finances.

Some have already had a boost. The last offer from the ECB of loans at near-zero rates was gleefully taken up by the banks. If rates increase before the loans are due for repayment, the banks can make a risk-free profit and the expectation is that they will go up at the beginning of next year.

Unless something very strange happens, there should be no large, rapid increase in borrowing costs, although there is always the danger that the ECB will succumb to pressure to do too much too soon. But any rise presupposes that income and employment are increasing, which itself will reduce the impact.

Very strange things are already happening of course - the chief one being Brexit. The fears of economists, bankers and civil servants about the impact on the UK economy of the decision to leave the EU proved wide of the mark, and they find themselves derided once again.

The facts on which they based their warnings have not changed though. What it shows once again is the impossibility of predicting how exactly people will react to any particular set of circumstances.

It is odd - to say the least - as the stories swirl around about firms relocating from the UK, investment falling and the world trading system becoming harder, not softer, that British sentiment remains buoyant.

It is a sign of the desperate desire for change across much of the rich world. Its leaders should be worrying more about the extent of the public's welcome for Brexit than if consumer sentiment were plunging.

At least until last week's missile-rattling, US President Donald Trump was proving a disappointment to his public. Brexit is not yet in place, so the hopes of its supporters cannot yet be dashed, but the pessimists may yet be proved right.

The question for the rest of the EU is whether improving economic conditions can turn the tide of discontent in their jurisdictions.

An analysis by the Brussels-based Bruegel think tank of the monthly "Eurobarometer" surveys of EU opinion suggests that they might.

Perhaps all the elaborate theories about the rise of populism and the end of democracy are over-egging the pudding. It's the economy, stupid.

The attitudes recorded in the surveys in almost every country follow the lines of the Great Recession closely. They are now turning upwards, tracking the recovery.

One is always a little wary of surveys such as this. Certainly, one has to look at the questions.

"How much trust do you have in the EU?" is open to different interpretations, as is what is deemed to be a positive answer, "I tend to trust."

When it comes to Europe, there is also the problem of translation. One does not have to be a linguist to know words such as "trust" are difficult to define and carry cultural baggage.

Having said that, the consistency of the findings does give them credibility. In Ireland, we could hardly quibble with the figures that say those having trust in the EU fell from 70pc to a low of 30pc, and in domestic democracy from 80pc to 50pc, as the economy imploded.

Some might wish to quibble with the improvement recorded since then, to 54pc for the EU and 76pc for government. But it seems telling that the upturns coincided with the start of the recovery in 2012.

The same pattern is evident in Greece and Portugal, although the EU's rating there has improved only to 40pc.

One striking feature is the high level of support for the euro everywhere, especially the east, where people trust the EU more than their own democracy, even in suffering Greece and suspicious Germany.

As for France, it did not have a recession on the scale of the peripheral countries but the change in attitudes is not that different. The French have relatively little trust in either their local democracy or the EU, with only 50pc positive about the former and 30pc about the latter.

There is as yet no sign of an improvement in this malaise. On the other hand, if the economy does pick up, and the new president gets off to a good start, who knows?

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