The euro zone recovers

Green shoots in mid-summer may well be out of season, but are nevertheless welcome. For the euro zone, the green shoots of economic recovery have finally surfaced, following the longest recession since the euro's introduction in 1999. Gross domestic product in the 17-country euro area rose a modest 0.3 per cent in the second quarter to June. This exceeded all forecasts, and gives grounds for optimism that the recovery can be sustained. For the Irish economy, heavily reliant on export growth for its revival, the euro zone's exit from recession could not have arrived at a more opportune time. It comes as Ireland prepares to leave the bailout programme.

For almost two years euro area economies have stagnated. Germany and France, where national output rose by 0.7 per cent 0.5 per cent respectively, are the two largest economies in the euro area. They have become the engine of growth lifting the euro zone out of recession. But, as the EU's economic affairs commissioner, Ollie Rehn has pointed out: "The growth figures remain low and the tentative signs of growth are still fragile." Italy, Spain, Portugal and Greece remain stuck in recession. Some countries – including Ireland – were not included in this survey by Eurostat, the EU's statistical office.

The euro zone’s very modest revival stands in contrast to the performance of the US, the world’s largest economy, which recorded a 1.7 per cent annualised rate of growth in the latest quarter. But even that rate of expansion is unlikely to do much to reduce debt levels or lower high unemployment rates, in the US or elsewhere. In the euro area, a two-tiered economy is now emerging. While Germany and France have managed to achieve modest growth, the peripheral economies faced with greater fiscal constraints must struggle to balance the need for austerity with the limited opportunities for growth.

What is still unclear is whether the euro zone’s modest and tentative recovery will strengthen and be sustained, and whether it will do much to tackle the euro area’s biggest challenge – unemployment. The rate of unemployment in the euro zone, 12 per cent, masks significant national differences, Spain has a jobless rate almost five times Germany’s.

Last week Mark Carney – the new governor of the Bank of England, made unemployment rather than price stability its main objective in setting monetary policy. The European Central Bank must operate with a more restricted mandate, where curbing inflation takes priority over lowering unemployment. The UK's unemployment rate (7.8 per cent) is something Mr Carney is concerned to reduce. The euro zone's unemployment rate (12.1 per cent) is something the ECB's president, Mario Draghi, can do nothing about.