Eurozone recovery should be let free

Whisper it softly to those worried the UK was shackled to a corpse: the eurozone economy is accelerating steadily. The monetary union grew faster than both the UK and the US at the start of the year, and new data are coming in ever stronger. Business managers report high confidence in both Germany and France. Consumer confidence, too, is the highest the eurozone has enjoyed in a decade.

When a German commentator allows himself to use the word “euphoric” about the buoyant mood in the country’s business sector (a measure of which has hit the highest level ever in history), things must be going well. Indeed contemporaneous “now-casts” indicate that the eurozone economy as a whole may be growing at an annualised rate of about 3 per cent, nearly twice as fast as the average for the past three years of steady but slow progress.

This should not have taken anyone by surprise. The only surprise is that it took so long. A depressed economy will eventually rebound of its own accord so long as policy is appropriate; but in the eurozone, fiscal and monetary tightening went on for years after 2010 when the opposite was needed. Once the tightening was halted, growth returned. But fiscal policy turned at best largely neutral, while monetary policy only started stimulating the economy aggressively with the beginning of asset purchases in early 2015. After a long period of self-afflicted sluggishness, the eurozone is finally behaving exactly the way one should expect once macroeconomic policy became reasonably appropriate.

The results are clear. The eurozone picked up in earnest last year, in sync with the rest of the world. Markets are enthusiastic about the euro and about European stocks.

The current upswing bears all the hallmarks of a recovery starting to reinforce itself. As the chart below shows, things have been going well enough to chip away at unemployment for several years. That may now be starting to show up in more robust consumption spending and, one must hope, eventually a strong investment rebound. Whether we should be surprised or not by the eurozone rebound is of more than intellectual interest. There is a short leap - too short - from thinking things are better than could have been expected to thinking they cannot be sustained. If observers - policymakers above all - sublimate surprise into pessimism, they risk clamping down on a recovery that still has a long way to go before there is any risk of the economy overheating.

The OECD estimates that many eurozone countries remain well below their productive capacity, and there is similarly an output gap in the eurozone as a whole (even if it sees Germany as firing on all cylinders and then some).

There are plenty of other indications of unused capacity. Unemployment rates are coming down (even, belatedly, in France). But joblessness is still high in many countries, and a significant number of people work less than they would like even if they are not counted as unemployed. All of this suggests that strong demand growth has some way to go before it would put pressure on the eurozone economy.

The European Central Bank has learnt the hard way that you can kill a recovery by being too afraid of inflation. Similarly, the European Commission is smarting from its excessive support for fiscal consolidation in past years. Both seem determined not to make the same costly mistakes that they made early in the decade. Brussels has called for a more stimulative fiscal stance across the eurozone. The ECB’s recent warning of an “abrupt” rise in bond yields is surely a signal that the central bank will be cautious not to withdraw stimulus too fast.

This is reassuring. The eurozone economy’s worst enemies have been its own economic stewards. If they can at least leave good enough alone and do no harm, the continent could continue to surprise for the next few years - in a good way this time.