November 14, 2017 / 4:55 PM / 5 days ago

Breakingviews - Euro zone boom stimulates reform complacency

LONDON (Reuters Breakingviews) - Italy’s failure to qualify for soccer’s World Cup may be a national humiliation, but the country has other reasons to celebrate. Europe’s fourth-largest economy is growing at a rate not seen since before the sovereign debt crisis. The data confirms the euro zone recovery is getting stronger and broader.

The euro sign landmark is seen at the headquarters (R) of the European Central Bank (ECB) in Frankfurt September 2, 2013. REUTERS/Kai Pfaffenbach

Italy’s quarterly GDP growth of 0.5 percent in the three months to end-September – or 1.8 percent compared with the same period of last year – was just one bit of good news from the euro zone on Tuesday. German economic output also expanded faster than expected in the third quarter, rising 0.8 percent compared with the previous three months. The single currency area’s overall growth rate of 0.6 percent was slightly slower than in the second quarter, but healthier: the gap between the growth rates of the zone’s four largest economies halved.

The region is enjoying multiple boosts as it recovers from a heavy crisis. Falling unemployment is boosting domestic consumption, helped by the European Central Bank’s bond-buying and negative official interest rates. A strong global economy ensures demand for exports. Political upheavals such as Catalan’s secession struggle or Britain’s vote to leave the European Union are so far having little impact: consumer confidence is at its highest level since 2000, according to Bank of America Merrill Lynch data. And the region still has more catching up to do. Unemployment of 9.6 percent is 2 percentage points lower than in 2015, but remains above its pre-crisis average of 8.7 percent. Investment as a proportion of GDP is lower than in 2000, according to UniCredit data.

One risk is that the ECB, whose bond buying and low rates helped stimulate the recovery, chokes it off by tightening policy too quickly. That could pure pressure on heavily indebted economies like Italy. Yet the pressure to act is modest: the ECB’s own survey of professional forecasters shows inflation at just 1.4 percent next year.

Even so, the euro zone is still incomplete. Governments need to align their economies with reforms, and the region must find ways of coping with future crises, such as completing the banking union and creating fiscal support for economies in a downturn. The biggest danger is that politicians, like Italian football fans, fall victim to complacency.

Breakingviews

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