‘Marginal’ growth in eurozone

The eurozone GDP growth figure will be released today, which is expected to show that economic activity across the region has expanded very marginally over the second quarter of this year.

The news will bring huge relief to the Brussels’ apparatchiks who have had to contend with increasingly gloomy news over the past three years. But whether these tentative signs of growth point to a more durable recovery or whether it proves to be a temporary respite before the region returns to crisis mode remains to be seen.

The eurozone’s problems are still very visible. The countries on the periphery (Spain, Italy, Greece, Portugal, Cyprus and Ireland) are going through painful devaluations.

The argument for the eurozone unravelling is that tensions between the core and the periphery are unbridgeable. The competitive economies of the north will never be compatible with the structurally uncompetitive economies of the south under the same interest rate regime. These tensions will always remain unless there is a concerted effort by the core members to inflate their economies or agree to some sort of transfer union.

The former is culturally unacceptable to the Germans and the latter option is legally prohibited under existing EU treaties.

And even though banking union on its own will not save the single currency, it is an important part of its future viability. If Berlin continues to oppose the most important part of the initiative — the single resolution regime — then it fatally undermines a key part of the banking strategy.

On the other hand, over the past three years investors have lost billions betting against the euro. At successive crisis summits, EU leaders have done just about enough to keep the euro together.

Moreover, Lorcan Roche-Kelly who is the chief European strategist with the US-based hedge fund, Trend Macro, argues that eventually the devaluation across the periphery will improve competitiveness to the point where there will be a pick up in exports and these economies will start growing again.

The fact that this is the first August in five years that the region has not been gripped by a crisis of some complexion shows that markets have become more comfortable with the single currency.

Only time will tell whether this proves to be prescient or foolish.