Europe's economy is finally turning the corner from its worst crisis in the postwar period after a devastating double-dip recession.
Grim confirmation on Friday of another slump in the first quarter still failed to dim prospects for the region that are as bright as they have been since the pandemic struck, with European Union-funded multi-year stimulus plans also finally taking form last week, and a growth pickup probably already under way.
The fiscal firepower waiting to be unleashed -- mostly on Europe's weak southern economies -- is almost unprecedented and complements central bank emergency support that is locked in well into 2022. The completion of a belated vaccination push looks increasingly like the key remaining unfinished business to secure a sustained rebound.
Indeed, the prospect of EU cash flowing as soon as July, with reopenings appearing plausible, mean a recovery is tangible enough for European Central Bank officials to start talking within weeks about slowing stimulus -- so long as progress on jabs keeps coming.
"The worst is definitely over for the euro-area economy and the best is still yet to come, though we'll have to wait a few more months before we get there," said Neville Hill, an economist at Credit Suisse in London. "We feel very encouraged that the economy will reopen this quarter and that should allow for a vigorous rebound later this year."
Another sign of the euro zone's gathering momentum revealed itself on Monday with an index of purchasing managers showing manufacturing activity at the highest level in the survey's 24-year history. Meanwhile the European Commission proposed reopening borders to fully inoculated travelers, a step toward a return to normalcy.
The EU fiscal stimulus is designed to sustain the economic pickup after it takes hold, focusing most on the region's perennially weaker members while dragging it in a greener and more digitalized direction.
Italy, the biggest beneficiary of aid and arguably the region's toughest growth challenge, has lined up grants, loans and its own top-up to ensure a flow of 261 billion euros ($316 billion) in spending.
Such is the scope and duration of the bloc's stimulus plans that some economists are prepared to be optimistic on its outlook.
"The plan is quite serious about reducing the economic divide in Europe," said Marion Amiot, senior economist at S&P Global Ratings. "It's an opportunity to change the growth outlook."
Boosting the economy
S&P says the overall effort could boost gross domestic product in the bloc by as much as 4.1% in the next five years, though Amiot cautions the real impact will be hard to judge until the end of 2022.
The damage to repair is widespread, with the economy having gone through two recessions since the coronavirus struck, most recently shrinking 0.6% in the first quarter. That's on top of a tumultuous decade after the 2008 financial crisis, when much of southern Europe contended with stagnation or deflation.
With vaccination campaigns picking up speed across the region, we expect a gradual unlocking from May to help GDP bounce back by 1.6% in 2Q.
While the EU fund is designed to forever change that narrative, officials know that throwing money at the problem isn't enough, not least if implementation then falls short in countries with creaking bureaucracy such as Italy.
"The hope is that when you reform public administration and render it more efficient, it helps absorb these investments," said Felix Huefner, an economist at UBS AG in Frankfurt. "But it's clear that with such a large amount of money, this is a big challenge."
REFORM PLAN HIGHLIGHTS
|Italy (both EU funds and own spending):
- Digitalization, innovation, competitiveness: 50.07 billion euros
- Green transition: 69.96 billion euros
- Infrastructure for sustainable mobility: 31.46 billion euros
|Spain (EU grant spending):
- Mobility, incl. electric cars and bicycles: 13.2 billion euros
- Building renovation: 6.8 billion euros
- Digitize public administration: 4.3 billion euros
- SME digitization, innovation: 4.9 billion euros
- Green transition, with building renovation, agriculture, infrastructure: 20.2 billion euros
- Competitiveness, incl. digitization: 5.6 billion euros
- Health, jobs: 15.2 billion euros
|Germany (total spending):
- Digitization: 14 billion euros
- Environment, energy transition: 11.5 billion euros
The extent of the euro-area's ills is also such that even a once-in-a-generation stimulus worth more than 800 billion euros, on top of national support packages, might still be insufficient to shift the destiny of its weaker members, not least if they don't concurrently pursue pro-growth reforms.
In Spain, for example, "the government thinks it will significantly elevate long term growth and reduce inequality," said Miguel Cardoso, chief economist for Spain at BBVA. "For this to happen, we need an ambitious labor-market reform."
For now, the prospect of a huge fiscal stimulus coming, combined with existing monetary support, is bolstering the outlook for a robust recovery. ECB Chief Economist Philip Lane even said on Thursday that the economy is at "an inflection point."
For his central bank colleagues, that augurs a difficult discussion as soon as their June 10 meeting on whether to start slowing emergency bond purchases.
But for that debate to take place, just as for the fiscal aid to work its magic, progress in vaccinations needs to advance. Some evidence of that emerged last week as Germany announced a record 1.1 million jabs on a single day, while Italy managed to exceed 500,000 for the first time.
"The first priority for Europe is to get the vaccination strategy right," said Fabio Balboni, an economist with HSBC Holdings Plc. "Until when restrictions are no longer in place, in our view, it's a little bit like pumping air in a balloon that's in a box."
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