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Eurozone Growth Stalled by French and Italian Declining GDPs

The tough times for the Eurozone are not going away any time soon, as the 19 nation bloc reported just 0.1% growth in its GDP for the last quarter of 2019. This is the worst economic performance by the Eurozone since early 2013. The Eurozone is facing challenges since the global crises but things are starting to get worse.

With Greece raising money from the markets successfully and Portugal and Ireland exiting their expensive bailout programs, the Eurozone was expecting a recovery period. However, the worsening debt crises and slow growth of major countries like France and Italy will halt this recovery.

France is the second-largest European economy and any positive or negative change in its performance does affect the entire bloc.

France’s economy shrank by 0.1% amid internal disturbance and rising debt. French growth has been dragged down due to ongoing protests in the country in response to President Macron’s pension reforms. Many major infrastructure development projects like ports, petrol depots, and railway networks have been disrupted due to these protests.

French manufacturing output also dropped by 1.6% in the last quarter, as overall business activity slowed down due to the protests. The US-China trade war has already resulted in a downturn in the manufacturing output of major economies across the globe.

However, the French finance minister, Bruno Le Maire, is hopeful about the nation’s ability to bounce back, saying “This temporary slowdown does not call into question the fundamentals of French growth, which are solid”.

The story of Italy isn’t much different from that of France. The only difference is that Italy has already reached the point where analysts are considering a possible bailout for the country, which has the largest nominal debt in the Eurozone. Italy’s GDP has also shrunk by 0.3%.

The domestic demand for goods and services has fallen in Italy as a result of the slowdown. Italian political turmoil and its growing debt create a recipe for an even bigger disaster for the Eurozone. The political tension between pro-EU and nationalist parties like Lega Nord and the Five Star Movement has created confusion in the country and the country is more focused on the politics of principles rather than on growth. Analysts believe that Italy’s problems aren’t related to the market; rather, it’s the politics that need to be fixed in order to put the country on a track of recovery. Even though the Italian debt-to-GDP ration is much lower than that of Greece, its nominal debt is too big to handle, even for the world’s biggest economic bloc.

Nations like France and Italy facing critical economic conditions will cause a lag in any EU recovery. The Eurozone can apply quantitative easing on countries that are struggling with the national debt, however this will create problems of its own.

Brexit has finally happened and the transition period of the UK getting completely out of the EU will be over by the end of this year. The EU will further see a decline in growth if the EU and the UK don’t finalize a trade deal by then. Add the coronavirus into the discussion and things start to look even bleaker for the Eurozone.

The Coronavirus outbreak has already stalled manufacturing globally, and with oil prices going down in the coming weeks amid less air travel, there will be a further slowdown in manufacturing output.

Traits like central banking fighting deflation, slow growth, expanding public debt and an aging population are usually associated with Japan, but the Eurozone is experiencing the same difficulties. After dealing with a couple of severe crises since the global financial crises, the Eurozone may experience similar or worse circumstances in the coming years.

The currency bloc needs structural reforms in order to get out of this trap where there is always one or two nations dragging the growth of the whole zone. Otherwise, the zone will keep experiencing the same difficulties over and over in case of a global market catalyst due to the underperforming members.