Spain's central bank last week forecast a 1.5 percent contraction of the economy this year with unemployment set to hit 27 percent. Italy's economy shrank by 0.9 percent in the last quarter of 2012 and the ratings agency Fitch has downgraded the country to two notches above junk status. Data issued last week showed that France's GDP fell by 0.3 percent in the last quarter and the Socialist administration of François Hollande, which took office 10 months ago on the promise of creating growth, has failed either to reduce the deficit, which will exceed the 3 percent target agreed with the European Commission for the end of this year, or to cut public debt which rose to a record 90.2 percent of GDP in 2012.
Britain, outside the eurozone but in the European Union, is fighting to avoid recession with growth down 0.3 percent in the last three months of last year. At last, the German economy is forecast to continue to put in a strong performance this year with the OECD last week predicting growth of between 2.3 and 2.6 percent for the year, but there was a tremor even in Europe's economic powerhouse when growth contracted in the last quarter of 2012.
Given the commitment to austerity to get the continent out of its troubles, as adopted by its leaders, it's hard to see a significant overall pickup in economic expansion; even President Hollande, the great growth advocate, is promising spending cuts. That will increase the already high level of unemployment in many of the zone's larger members as the public sector is slimmed down and companies hold back from investment or remodel their businesses to become more competitive with fewer staff. The need for structural reform, including labor markets, has been evident for decades, but the easy early years of the eurozone lulled governments and citizens into complacency.
Now the price is being paid and the battle lines are drawn between the austerity-minded north European states, generally in good shape, and their southern partners, which are not. Political factors now come into play in some of the continent's biggest nations. Italy is in the grips of a governmental crisis after inconclusive elections. Hollande is at a record low in the polls and failed to deliver a convincing message in a major television interview last week. Spain's ruling party is accused of involvement in a funding scandal.
With federal elections later this year, the continent's strong woman, Angela Merkel, cannot afford to offer concessions that German voters would see as pandering to countries which, in their view, have already been allowed to get away with fecklessness for far too long. Extremist parties and movements that denounce the political establishment have made ground in Italy and Greece while a quarter of the electorate opted for anti-European candidates in the first round of last year's French presidential election.
Behind such immediate problems lurks the fundamental question of whether the construction of the eurozone can be completed by the fiscal union it requires to operate as a true common currency. That would involve a surrender of sovereignty, which would stick in the throat of some states, starting with France. The balance of power means that advancing the process that began with the Treaty of Rome in 1957 would inevitably be done on terms set by Germany and its economically strong allies in northern Europe. That would be difficult to resolve by the kind of muddling through we have seen in the current crisis. So far, politicians may congratulate themselves on having engineered a series of last-ditch escapes, but the longer this goes on, the more difficult it will be to keep up the act.
