July 26, 2013 6:54 pm

Europe risks the ‘wrong’ kind of recovery

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Eurozone and Britain show little sign of rebalancing

For the past few years, the growth experiences of Britain and the eurozone have been marked by a similar sense of disappointment. The currency bloc has shrunk continuously since the autumn of 2011. The UK has expanded, but its recovery from the crash is still the slowest in a century.

This week statistics on both sides of the channel provide a rare taste of optimism. In the eurozone, surveys of economic activity registered the first expansion in 18 months – a sign that the euro area may pull out of its recession by the end of the summer. The UK had even better news. In the three months to June, the British economy expanded by 0.6 per cent, the second-largest quarterly increase since the end of 2011.

Europe’s citizens will no doubt hope these green shoots will last beyond the summer. A more robust labour market is needed to solve the continent’s job crisis, which is particularly severe among the young. A sustained recovery would make it easier to mend public finances that are still shaky.

An equally important question, however, is whether Europe’s tentative spurt of growth is balanced. For Britain, this means moving away from a pre-crisis model driven by a bloated banking sector and fuelled by credit-financed domestic consumption. A eurozone where all the growth was in Germany would be equally unsustainable.

Regrettably, the composition of British growth still looks too similar to the past. True, in the three months to June, production, construction and services all surged – a healthy sign of broad-based expansion. But the rise of manufacturing is still too slow. Nor is there any sign that the economy is rebalancing from consumption to exports. The trade deficit in the past year has been flat at roughly £2bn a month, while retail spending has gone up.

In the eurozone, the rich northern countries are looking in better shape. In July, business activity in Germany rose at its fastest rate in five months. But the outlook for crisis-hit countries is still grim. In Spain, unemployment fell in the three months to June. But since the bulk of the newly created jobs were on temporary contracts, this resembles more a seasonal pick-up than sustained growth.

When the crisis struck in Europe, its political leaders announced this was a good opportunity to rebalance their economies towards a more sustainable model. So far, they have made little progress. In a week when they celebrate the first tentative signs of a welcome recovery, they should remember that how an economy expands is just as important as whether or not it grows.

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