The inspiration for this article arose from Cyprus news broadcasts stating that the “best” (that is the lowest level) of inflation in the Eurozone in 2012 was achieved in Greece and that Cyprus (with France) was second in this dubious ranking. The implication was that this was a success and that both countries had done better than their euro-partners, with a hint that the economies may be turning a corner and getting out of recession. I, therefore, thought it necessary to bring some reality into the picture and explain that countries in recession normally do not have inflation, and may have deflation (price levels falling). In other words the announced success in inflation, was in fact a reflection of how serious the recession is, and should not be cause for rejoicing or “besting” the other Eurozone countries.
To put matters into perspective we can compares Eurozone economic growth, and recession (negative growth) with inflation in 2012, as presented by Eurostat. It can be seen that Greece does have the deepest recession with minus six per cent GDP, and the lowest level of inflation (0.3%). Cyprus comes in third in recession rankings with Italy and Slovenia, all with minus 2.3% GDP performance, and has the second lowest inflation (1.5%), the same as France that is teetering on recession but not quite there yet. This generally assumed relationship between recession, unemployment and falling or low price changes is consistent with events on the ground in Greece and Cyprus, as well as France, but the pattern in the other recession inflicted Eurozone states is not in line with the theory. It will come as no surprise to people in Cyprus that the jokers causing inflation are primarily energy, and especially electricity prices, suggesting that much of the problem arises from external factors (oil prices).
In this respect Greece and Cyprus would at least please the International Monetary Fund in that their competitiveness appears to have been improved against the Eurozone states, because prices have risen less than in other member states. Therefore the products and services offered by others are relatively more expensive. Nevertheless this has been achieved at very high social cost, especially in Greece.
There were eight Eurozone states in recession in 2012, Greece, Portugal, Cyprus, Slovenia, Italy, Spain, Netherlands and Belgium, which with the exception of Greece and Cyprus all had inflation rates above the benchmark 2%. Furthermore there were another six states, on the edge of the cliff face of recession, with less than 1% growth. These are Finland, Luxembourg, France, Ireland, Germany, and Austria. With all the big guns of the zone facing problems, the only countries with significant positive growth were Malta, Estonia and Slovakia, and they could not provide the weight to keep the Eurozone out of recession. Eurozone GDP fell by less than one per cent in 2012 (-0.4%).
The recession countries facing the highest inflation were Spain (3%), and Netherlands (3.4%), which means that the Spain in particular is jammed between a rock and a hard place, if you excuse an American expression. Austria at 2.9% inflation is close to such levels of inflation, and Estonia and Slovakia are at 3% or above, but they are growing. Overall inflation in the zone was 2.2%.
When expenditure categories are considered the highest inflation rates in Europe were for energy, and especially electricity, food and tobacco, transport which is dependent on energy, and housing. Presumably the high prices for oil and other fuels are a major factor, while alcohol and tobacco may be influenced by tax increases (Eurostat does not provide analysis).
Overall the omens are not good for the Eurozone economies, and the projection for 2013 is not encouraging with virtually zero growth predicted. All the major economies, Germany, France, Italy and Spain will be essentially in stagnation, and the few bright spots are likely to be small countries. Recovery is not anticipated until 2014, and even then it is expected to be a weak overall at 1.4% GDP real growth.
Costas Apostolides is chairman of EMS Economic Management Ltd (Email: [email protected]).
