BERLIN—The euro zone's recovery from crisis looks stuck in low gear, posing risks to its struggling members and weighing on fragile global growth.
The world economy's most-troubled region in recent years is likely to grow at least a little in the coming year, extending a recovery that began last summer.
But the slow pace could become a trap. Expected growth of about 1% is too little to bring down mass joblessness, which is testing social and political cohesion in weaker countries.
Stubbornly low inflation of about 1% or less is also too low for comfort, because it's pushing weaker countries close to deflation and making it harder to bring down their debts.
"We do have a recovery, of that we can be confident," says Julian Callow, chief international economist at Barclays BARC.LN +0.15% in London.
"But the task is to nurture it, because it's not strong enough to make a significant impact on unemployment, which is the primary source of the disinflation."
The European Central Bank is the actor witoolsth the tools to do something about below-target inflation and falling bank lending.
But the question, say economists, is whether the ECB is willing to experiment with unorthodox measures such as money-printing or negative interest rates, which would cause anger in Germany, the euro's biggest member.
Germans generally don't like central-bank activism and their relatively healthy economy doesn't need it. The good news: Europe's currency union, which grew to 18 countries when Latvia joined on Jan. 1, is unlikely to go through the kind of financial turmoil in 2014 that shook the region, and frightened markets world-wide, from 2010 to 2012.
Tremors such as Cyprus's near-bankruptcy and political chaos in Italy in 2013 failed to disturb the euro zone's newfound financial calm.
The ECB's success in stabilizing financial markets since 2012 allowed the "real" economy to start recovering in 2013—but at a pace so slow that the region will need years to heal.
One big problem: A German-led policy emphasis on belt-tightening and regulatory overhauls has left the euro-zone economy overall with a shortage of demand. Only global demand for Europe's exports has offset the simultaneous retrenchment by private and public sectors around the currency zone.
The outlook for those overseas exports is patchy, especially to Asia. As weak demand has pushed euro-zone inflation below 1% recently, much debate has centered on whether Europe could sink into outright, hard-to-escape deflation à la Japan.
But unless there are fresh shocks—such as, say, a big rise in the euro—it's more likely that inflation will stay stuck well below the ECB's target of just under 2%. That means that the weaker euro members, which must repair their competitiveness by pushing down their wages and prices relative to the euro-zone average, are at risk of deflation.
Greece already has sharp deflation; Spain is on the brink. Deflation makes debts loom larger, relative to people's and countries' incomes. Even if this doesn't lead to a new outbreak of the debt crisis, the combination of low growth and inflation leaves much of the euro zone facing stagnation in the longer term, economists say.
The jobless become less employable the longer that high unemployment persists. Companies don't invest to innovate or raise productivity, the longer that their revenues remain weak and debts heavy. It isn't the dynamic economy that the euro zone needs to prepare itself for the already rising costs of aging populations.
The recovery needs to be twice as fast, and inflation twice as high, say many economists. "The social and political effects of stagnation are unpredictable, but we should take them seriously," says Paul De Grauwe, professor of political economy at the London School of Economics. "The risks are not in financial markets but in societies now."
wsj.com
The world economy's most-troubled region in recent years is likely to grow at least a little in the coming year, extending a recovery that began last summer.
But the slow pace could become a trap. Expected growth of about 1% is too little to bring down mass joblessness, which is testing social and political cohesion in weaker countries.
Stubbornly low inflation of about 1% or less is also too low for comfort, because it's pushing weaker countries close to deflation and making it harder to bring down their debts.
"We do have a recovery, of that we can be confident," says Julian Callow, chief international economist at Barclays BARC.LN +0.15% in London.
"But the task is to nurture it, because it's not strong enough to make a significant impact on unemployment, which is the primary source of the disinflation."
The European Central Bank is the actor witoolsth the tools to do something about below-target inflation and falling bank lending.
But the question, say economists, is whether the ECB is willing to experiment with unorthodox measures such as money-printing or negative interest rates, which would cause anger in Germany, the euro's biggest member.
Germans generally don't like central-bank activism and their relatively healthy economy doesn't need it. The good news: Europe's currency union, which grew to 18 countries when Latvia joined on Jan. 1, is unlikely to go through the kind of financial turmoil in 2014 that shook the region, and frightened markets world-wide, from 2010 to 2012.
Tremors such as Cyprus's near-bankruptcy and political chaos in Italy in 2013 failed to disturb the euro zone's newfound financial calm.
The ECB's success in stabilizing financial markets since 2012 allowed the "real" economy to start recovering in 2013—but at a pace so slow that the region will need years to heal.
One big problem: A German-led policy emphasis on belt-tightening and regulatory overhauls has left the euro-zone economy overall with a shortage of demand. Only global demand for Europe's exports has offset the simultaneous retrenchment by private and public sectors around the currency zone.
The outlook for those overseas exports is patchy, especially to Asia. As weak demand has pushed euro-zone inflation below 1% recently, much debate has centered on whether Europe could sink into outright, hard-to-escape deflation à la Japan.
But unless there are fresh shocks—such as, say, a big rise in the euro—it's more likely that inflation will stay stuck well below the ECB's target of just under 2%. That means that the weaker euro members, which must repair their competitiveness by pushing down their wages and prices relative to the euro-zone average, are at risk of deflation.
Greece already has sharp deflation; Spain is on the brink. Deflation makes debts loom larger, relative to people's and countries' incomes. Even if this doesn't lead to a new outbreak of the debt crisis, the combination of low growth and inflation leaves much of the euro zone facing stagnation in the longer term, economists say.
The jobless become less employable the longer that high unemployment persists. Companies don't invest to innovate or raise productivity, the longer that their revenues remain weak and debts heavy. It isn't the dynamic economy that the euro zone needs to prepare itself for the already rising costs of aging populations.
The recovery needs to be twice as fast, and inflation twice as high, say many economists. "The social and political effects of stagnation are unpredictable, but we should take them seriously," says Paul De Grauwe, professor of political economy at the London School of Economics. "The risks are not in financial markets but in societies now."
wsj.com
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