Director of Eurointelligence.com Wolfgang Munchau has painted a pessimistic view of the strength of the eurozone, saying that “rumours of a return to economic health are vastly exaggerated”.
Mr Munchau admitted that the financial area was improving but it would take at least a decade for it to recover and that “extreme policies” were needed because it was in “such bad shape”.
The German economist pointed to findings by the European Central Bank (ECB) which highlighted the problem of the broader unemployment rate – known as U6 – which looks at not just those who are registered unemployed but the wider categories of hidden unemployment – those that might not be actively seeking work – which the ECB puts at a sizeable 18 per cent across the zone, compared to a figure of nine per cent in the United States.
He also viewed the core rate of inflation – excluding energy and food prices – as being “sticky” and has not been above 2 per cent since 2008.
In turn this would imply that interest rates are unlikely to rise substantially in the short term, potentially suffocating any new growth.
The recent turmoil in Catalonia has also upset things as well as the ongoing concerns over the lasting impact of Brexit.
Markets like certainty and predictability and bankers shy away from uncertainty.
At the minute, no one knows just how the antagonism between Madrid and Barcelona will ultimately play out and the repercussions from Britain’s exit from the European Union (EU) is still being felt which give cautious bankers the jitters and are not prepared to commit during uncertainty.
Another key factor that Mr Munchau highlights is the reason that the ECB continues to buy assets – such as government bonds.
Writing in the Financial Times today, he says: “If it were to stop, the eurozone crisis might return.”
He points to the problem of Italy trying to get to grips with its public sector debt which is currently running at a staggering 130 per cent of GDP.
But more worryingly, he adds that despite a general election in the country next year he sees no prospect of any possible government attempting to tackle the issue and initiate structural reforms to improve long-term productivity.
In reference to net asset purchases, Mr Munchau said: “Depending on the politics, the ECB may never be able to stop them.
“If it did, it would cause financial and economic instability.
“An Italian debt restructuring would have severely disinflationary effects on the eurozone, and the ECB is under a legal obligation not to allow that.”
“These extreme policies are needed because the eurozone economy is in such bad shape.
“It is getting better for sure, but we are looking at a decade-long recovery.”
Meanwhile, Polish Finance Minister Mateusz Morawiecki said that Poland wanted to see the eurozone become stronger before it made a decision on whether to join or not.
Mr Morawiecki said: “We are holding our fingers crossed for the euro zone to survive, to overcome its imminent problems… Surely, the convergence is not happening as the authors wished it.
“We would like the euro area to be strong and then in a few years will see how it copes with everything.”