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FS: Economic recovery in the eurozone: the real engines of growth
 
A depreciated euro and low oil prices have acted as main drivers of GDP growth in the eurozone. Research has revealed that economic performance in Germany, France and Italy in the first quarter of 2015 would have been feeble had it not been for the external shocks. As the unexpected champion, Spain has been the only country out of Europe’s four largest economies to show endogenous growth.
Economic growth in the European Union has successfully gathered momentum over the past year. According to the European Commission’s Spring Economic Forecast, real GDP in 2015 is expected to rise by 1.8% in the EU-28 and by 1.5% in the Eurozone. The figures are respectively 0.1% and 0.2% higher than three months before.
Despite the buoyant forecast, optimism has been tempered by uncertainties regarding the sustainability of economic growth in the region. The fall in oil price and the euro’s depreciation have substantially increased output in the eurozone, rendering question whether endogenous factors alone could sustain growth when the positive external conditions are no longer met.

In Europe's case, the rationale is simple. The low oil prices increase real household income and corporate earnings, consequently raising household spending and corporate investment. The fall in oil prices led inflation to decline and real wage to rise year-on-year by 0.7% in Germany, 1.1% in France, 0.9% in Spain and 0.8% in Italy.



Similarly, the euro’s depreciation causes exports to rise, positively impacting corporate investment. Taking into account the weight of exports in the GDP, currency depreciation has increased exports in the first quarter of 2015 by 1% in Germany, 1.8% in France, 2.3% in Spain and 1.2% in Italy.



When combined, the two factors account for a large share of growth in the bloc’s main economies. Without the fall in the oil price and the euro’s depreciation, GDP growth per year in Germany in the first quarter of 2015 would have been 0.25% rather than 0.95%. Likewise, instead of growing 0.8%, France would have stagnated entirely. In Italy, growth would have been -1.0% instead of 0.1%. Surprisingly, the Spanish economy would have managed to grow 1.5%, an impressive number even if well below the original forecast of 2.65%.



The picture that emerges from such figures is that of economic fragility, as the bloc’s fortune remains at the mercy of external agents. As the future becomes all the more blurry for the eurozone, the 19 economies should start entertaining scenarios where external conditions are no longer favourable and focusing on policy solutions that will pave the way for long-term recovery. Indeed, Europe has yet to tackle unemployment, high government debt and low investment spending. All of these issues are obstacles to growth and are currently hiding behind exogenous factors that, despite being indisputably positive, will not last forever.

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