One term that frequently appears in economic reports about Europe is “narrowly avoided.” Analysts use this phrase so frequently that it has almost become a running joke. Early in 2023, the eurozone barely avoided going into recession. At the end of that year, it just missed it once more. Every few months, forecasts of contraction are released by economists, and every few months, Europe manages to cast doubt on those predictions. Not in a victorious manner. Not very impressive. Just enough to get by.
The data presents an odd narrative. The GDP of the eurozone increased by just 0.1% in the first quarter of 2023. That’s the type of person who doesn’t generate wealth, jobs, or self-assurance. However, it was sufficient. In technical terms, it meant that the bloc avoided a recession, which calls for two quarters in a row of negative growth. It was referred to by chief economists at organizations like Capital Economics as avoiding recession “by a whisker.” Because it was true, that phrase stuck. This was merely the lack of a technical defeat, not a true victory.
The energy shock was what made 2022 and 2023 so unstable. Natural gas prices skyrocketed throughout the continent following Russia’s full-scale invasion of Ukraine in early 2022. German factories began debating whether to continue operating at all. Industrial collapse was predicted in the headlines. Nevertheless, the winter that was meant to shatter Europe proved to be milder than anticipated. The levels of gas storage remained stable. Although they were still high, energy prices started to decline. It’s possible that European businesses and households adjusted more quickly than anyone had anticipated, changing, cutting, and modifying consumption in ways that were not included in any model.
Unbeknownst to most, Italy and Spain have borne a greater portion of the burden. The largest economy on the continent, Germany’s, shrank during the entire year and in the fourth quarter of 2023. That is important. However, Italy added 0.2% and Spain reported 0.6% quarterly growth during the same time frame. Despite their modest nature, those figures contributed to the overall eurozone figure remaining flat rather than negative. That has an almost ironic quality. The nations that faced social unrest and required bailouts during the sovereign debt crisis ten years ago are now subtly keeping the bloc together.
The European Central Bank plays a complex role in all of this. In order to combat inflation, it raised interest rates sharply for the majority of 2022 and 2023, which obviously hampered growth. Both households and businesses found borrowing to be costly. The level of domestic demand decreased. However, the ECB also contributed to the financial system’s stabilization because of its earlier pledges to support sovereign debt markets, which were painfully developed during the crisis years between 2009 and 2018. As a result, there was no panic or bond market contagion of the kind that almost destroyed the eurozone ten years ago. Even though the lessons learned from that crisis were harsh, they seem to have held true.
To refer to this resilience as a success story would be incorrect. In certain member states, unemployment increased. In others, poverty indicators shifted in the opposite direction. When real wages have been declining due to inflation, growth of 0.5% for the entire year 2023 does not feel stable. Commerzbank’s senior economists stated unequivocally that the data was “no reason to celebrate.” That assessment seems accurate. Europe is not prospering. It’s continuing.
However, the bloc’s consistent resistance to the worst-case scenarios is noteworthy. The energy shock, the COVID-19 pandemic, and the debt crisis all proved to be more serious than anticipated. Despite all of its shortcomings, Europe’s economic structure may have more cushioning than outsiders usually realize. Or perhaps it continues to be fortunate. Most likely both. Seldom does the eurozone shine. However, it appears to continue finding the floor for the time being.
