This, however, might be a false comfort. Chris Williamson, Markit’s chief economist, says output has held up because firms have worked on the backlog of orders they received in better times. But, he says, with new orders falling, this support might soon be removed.
Worse still, I fear that two other comforts aren’t terribly strong either.
One of these is that the euro’s trade-weighted index has fallen by 7.6 per cent in the last six months, to a six-year low. This, plus decent growth in Asia and possibly the US, should support exports.
The problem with this, however, is that the euro area as a whole is a quite closed economy. Goods exports to non-euro economies account for only 18.4 per cent of euro area GDP. From such a small base, it is unlikely export growth will be enough to support the economy.
A second false comfort is that real short-term interest rates are negative.
But the problem is not the price of credit but rather its availability. If banks are unable or unwilling to lend, and if firms are reluctant to borrow for fear that credit lines might be withdrawn in future, the price of credit doesn’t much matter.
It’s in this context that fiscal austerity becomes all the more worrying. Azad Zangana at Schroders estimates that the region will see a fiscal tightening equivalent to just over one per cent of GDP this year.
Granted, there have been episodes in the past when such tightenings haven’t much hurt economies. But these were periods when private sector borrowing increased to offset public sector saving. This is an unlikely prospect this year.
Mr Zangana foresees the region suffering a “significant recession”, with GDP falling by 1.8 per cent this year.
This poses the question: what will be the policy response?
If financial markets are lucky, the recession might force politicians and the ECB into a “grand bargain”, in which there is serious fiscal union – involving transfers of aid to southern countries and not just enforced austerity – accompanied by the ECB announcing genuine quantitative easing.
There are, though, other possibilities, even aside from the obvious one that one or more countries might leave the euro. One, says Mr Zangana, is that governments might resort to financial repression – tricks to force banks and institutional investors to hold government debt even if returns on it are poor. Another is that we might see increasing demands for populist policies such as a financial transactions tax, wealth tax or even capital controls – measures of dubious efficacy but which would hurt financial markets. More radical still would be what Duncan Weldon at the TUC calls “artificial devaluation”. He suggests that, rather than leave the euro – which would be at least temporarily catastrophic - southern European economies could tackle the problem of their lack of competitiveness by taxing imports and subsidizing exports. Whilst this might save the euro, it would kill the single market.
We don’t know how this will play out. The point, though, is that this is not just an economic crisis. It might, increasingly, become a political one.
