With mid-summer optimism, one expects that the worries about the stagnant economies of eurozone are over and recovery, which has been elusive, finally creeps in. On the surface, the waters appear calm such that ostensibly everything seems fine. You read the tabloids and you see no major turbulences buffeting the financial markets and one may almost say that the markets seem to be finding a belated stability. The panic that many experts feared after the downgrading of eurozone countries last year by rating agencies Standards & Poor’s has failed to materialise. It is surprising that, notwithstanding the downgrade, investors keep on buying Italian, Spanish and French government bonds. But the calm is deceptive and there is a caveat somewhere.

Let us revisit the progress (if any) registered by the first three rescued eurozone countries – Greece in the spring of 2010, Ireland at the end of that year and Portugal in mid-2011. It is encouraging too observe that Ireland has seen quality improvements and, as can be seen by its resilient economy, looks set to be the first to triumph as a reformed economy possibly by mid next year. Not so for the other two countries as they are still trying to appreciate the austerity cure prescribed by the Iron Lady in Berlin. Still there is a whiff of hope that Europe is scraping the bottom of the barrel and Eurostat reported the aspiring news that its gross domestic product grew 0.3 per cent in the second quarter. A swallow does not make a summer but one can thank heaven that it is the first positive GDP reading for Europe since the third quarter of 2011 and ushers an end to an 18-month recession that broke the eurozone record.

So can we uncork the champagne? Not so quickly as the recovery is fragile and after all one cannot simply judge slight improvements in GDP as a harbinger of good tidings. Can we agree that German austerity is working and the patient is on the mend? While the second quarter expansion was modestly better than expected, the eurozone still faces a tough job developing recovery momentum. Sceptics rightly tell us that on its own, GDP growth is not a complete indicator, as it says nothing about the quality of growth, future productivity or the happiness and well being of its citizens. It ignores hidden economic activity and income inequality as recently commented by Zachary Pandl, a Columbia Management interest-rate strategist.

Calling two or more quarters of negative GDP a recession doesn’t make much sense in real life and one may prefer the definition of a recession as pronounced by the US National Bureau of Economic Research: “A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” Using this definition makes more sense and posits another question whether the temporary improvement in GDP is in fact sustainable as really and truly none of Europe’s underlying problems have been solved. Austerity is still the law of the land throughout much of the eurozone, particularly in countries that have gone to the “Troika” asking for bailout money.

But what does this political backdrop mean for the Merkel /Hollande marriage of convenience? The answer is that it sheds a new weakness for the euro that markets so far appear to have overlooked. As Sassan Ghahramani, president and chief executive of SGH Macro Advisors reported in The Wall Street Journal, Hollande is more hesitant to toe the hard line and may even have a tough time passing a constitutional budget amendment. Hollande clearly declared that he wants to renegotiate Europe’s “new agreement on fiscal discipline” and has called for the European Central Bank to play a larger role, including issuing a common euro bond. Such ideas are strongly opposed by both Chancellor Angela Merkel and the German parliament.

Socialist Francois Hollande has already criticised the style of German Chancellor Angela Merkel and rejected her demand to allow to bring proceedings against deficit rule breakers before the European Court of Justice or to modify the EU treaties. Therefore, Angela Merkel with a decisive election next month will be watching the national political developments of France with concern, particularly since any imminent agreement on urgent issues such as fiscal union may not last beyond September. It is hard to predict which direction a new chancellor in Germany will decide to take to calm the eurozone’s troubled waters. However, on a positive note David R. Kotok, chairman and chief investment officer of Cumberland Advisors, thinks that “Europe will find a way” to stick together because “they do not have a death wish”. So the eight sick patients who are under a bailout surveillance want to recover and extricate themselves from their predicament even though most complain that the pain is real and the medicine sour. However, hope springs eternal given that the bailout countries are achieving a lower credit rating when borrowing on the bond market.

Another bit of good news is that US is seeing better job creation and improved domestic spending even though last year it lost its excellent rating when it was downgraded by Standard & Poor’s. Can the American swift recovery help bring more confidence in Europe this winter? Naturally, since the crash of 2008, there has been a concerted effort in Europe to sanitise the toxic debts of banks and taxpayers grudgingly accepted to put more rescue funds to bail them out together with better regulation on investment banking. The bright idea of creating a pan- European banking union is fine on paper but will take time to materialise. The grim reality is that the EU banking sector is still riddled with bad debts and hesitant to lend more, making the European Central Bank helpless to speed up new lending. Regrettably, this phenomenon is also hitting Malta where lending is tight and unless resolved one expects next winter to lead to higher unemployment levels. On the other hand, it is comforting that the national pre-budget document for 2014 talks about initiatives and efforts targeting the energy sector and reducing Malta’s dependence on oil, encouraging greater labour participation especially among women through free and expanded childcare services, and addressing early school leavers, expanding tertiary education, curbing illiteracy rates, and ensuring the sustainability of pensions by exploring the introduction of the third pension pillar. The Finance Minister is telling us to be patient as the ship of state is in safe hands (we heard this before, a case of dejá vu) and there will be no austerity in sight. On the contrary, a bold initiative is on course to reduce tax on managers’ salaries by 10 per cent and a 25 per cent cut in energy tariffs for consumers. More good tidings reveal that deficit improved by €43 million from €284 million in January-June 2012, to €241 million in January-June 2013. The writing on the wall is "we are on track, and savings are already being registered” as can be seen in surveys that measure consumer confidence showing shoppers are feeling positive which is vital in an open economy where last year saw the deficit trip over the three per cent to GDP ratio.

Anyway, the latest news from the United States of America gives further reasons for hope as the US economy is recovering earlier than expected, according to current Economic Report of the US Federal Reserve. Thus, the chief economist of Moody’s, Mark Zandi revised its growth forecast of the US economy for 2013 upwards. He assumes that the gross domestic product (GDP) will grow by 2.6 per cent this year. Even Moody’s predicts a stronger recovery of the non-farm labour market in comparison to the last year as the unemployment rate is slowly declining. Just a year ago, in the midst of the fiscal cliff, experts warned of a major crisis of US municipal bonds. But the disaster has been avoided and instead the first successes have become apparent as both crisis-ridden communities and some states achieved their first savings. In this way the US example has shown that there is a way out of the crisis and European leaders may do well to emulate it. To conclude, perhaps it is not all gloom and doom as even at the height of the euro crisis several states still wish to join the European Union so it appears that the EU continues to be attractive with Croatia joining the club last July. Let us hope that the ice bucket currently empty will soon be replenished with finest champagne to celebrate the new direction once the German election results are out.

The writer is a partner in PKFMALTA, an audit and business advisory firm.

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