FROM one perspective the euro area is suffering an existential crisis as the sovereign-debt crisis goes from bad to worse. Early next week European finance ministers will talk about little else when they meet in Brussels. Not only will they have to sort out the planned bail-out of Portugal, the third country to require emergency funding, but they will also have to consider the predicament of Greece, which now looks as if it will require even more support next year or bite the bullet on restructuring its colossal debt.
But from another vantage-point the euro area is confounding the sceptics and doing remarkably well. After a dull performance in the second half of last year the single-currency economy has put on a burst of speed. Figures out today showed that GDP grew by 0.8%, comfortably above the 0.6% generally expected, and a marked improvement on the dull performance in the second half of last year when it rose by 0.4% in the third quarter and 0.3% in the fourth. That acceleration pushed the annual growth rate up from 2% in late 2010 to 2.5% in the year to the first quarter of 2011.
The schizophrenia reflects the continuing divergence between northern and southern Europe. The overall expansion continues to be driven by Germany, the euro area’s powerhouse making up 27% of euro-wide GDP, whose output expanded at a rattling 1.5%. Growth in France, the second-biggest economy constituting 21% of single-currency GDP, had been lacklustre last year but it pitched in a healthy expansion of 1% in the first quarter of 2011.
Meanwhile southern Europe continued to flounder. Italy barely grew at all, by just 0.1%, the same as in the fourth quarter of 2010. Spanish GDP rose by 0.3%. Portugal re-entered recession as its economy declined by 0.7% following a fall of 0.6% in the final three months of 2010.
Amid the southern gloom there was one ray of light, though it may prove treacherous. The Greek economy, which has been in a prolonged recession, actually expanded by 0.8% in the first quarter. Any celebration would be premature since the fall in output in the last three months of 2010 was 2.8%, twice as big as previously estimated. If the Greek recession were to end this year that would strengthen the case for those who argue for persisting with the present bail-out strategy. That would be a mistake since a restructuring of Greece’s debt still looks inescapable.