Economic Policy: Reading The Tea Leaves

Sir Humphrey Appleby, the senior mandarin at the centre of the British sitcom “Yes Minister” once observed that “You can prove almost anything with statistics”. It certainly helps, however, to have a clear trend emerge from the statistics available to you.

The European Commission’s statistical agency, Eurostat, has released some very mixed economic data over the last few weeks. Various indices have been going up and down across the EU27 economies and the EU as a whole.

 First, the good news. GDP fell in the three months to June by only 0.3% across the EU and 0.1% across the euro area. This compares with a first quarter drop of 2.4% and 2.5% respectively. In large part this was because Germany and France, the euro area’s two largest economies, pulled out of recession in the second quarter, both registering GDP growth at 0.3%. Exports picked up slightly in Germany mainly thanks to a swift recovery in Asian markets, whilst consumer demand picked up in both countries thanks to subsidies to trade in old cars for new as well as schemes to keep people in work. Among the smaller economies, Greece and Portugal also climbed out of recession at similar rates.

However, most other countries continued to slide further into recession, notably the other big economies of the UK (-0.8%), Italy (-0.5%) and Spain (-1%). In part this is because some economies are more dependent on financial services, such as the UK, whilst others have experienced housing busts, such as Spain, Ireland and the UK again. Italy on the other hand has been the perennial European underperformer of the decade as its export orientated economy has struggled to adapt to competition from Asian manufacturers for years.

Furthermore, this week Eurostat released the latest figures on other economic indices. Industrial production fell in July on a seasonally adjusted level by 0.3% in the euro area and 0.2% across the EU. This was faster than the falls recorded for June. In the second quarter employment was down 0.5% in the euro area and 0.6% in the EU27. On the other hand, despite the boost in consumer demand in Germany and France, retail sales in July fell 0.2% in the euro area but rose 0.2% in the EU as a whole.

As a result, with the strong downturn at the end of 2008 and start of 2009, the Commission’s forecast for this year, released on 14 September, as a whole remains unchanged: GDP is expected to fall by 4% in both the EU and the euro area. The Commission has spotted grounds for optimism going forward into next year, namely healthier conditions in financial markets along with some of the more positive economic data.

The fact remains however, that the data is so varied, so it is hard to draw conclusions as to the effectiveness of the different policies put in place across EU member states to tackle the recession. Although some countries may already be pulling themselves out of a slump, others have further to fall. Moreover, this crisis has exposed structural issues in the various member states which were apparent when the Lisbon Agenda was drawn up in 2000. Its aims were to make the EU the “most dynamic and competitive knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion, and respect for the environment by 2010”. If the tentative signs of a recovery are to have more solid foundations than unsustainable car-scrapping or job protection schemes, then European leaders should take this opportunity to start seriously restructuring their economies.