Curious Capitalist

Europe’s False Recovery

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A graffiti depicting European Central Bank President Mario Draghi and German Chancellor Angela Merkel outside the construction site for the new ECB headquarters in Frankfurt in July 3, 2013.

When is a recovery not a recovery? When it comes in the euro zone.

On Wednesday, Europe officially vaulted out of its longest recession since the creation of the single currency, growing 0.3% after shrinking exactly that much in the first quarter. While that still only adds up to 0% growth, European officials are already lauding their “success” and attempting to rebrand their much maligned economic formula of austerity. “The data … supports, in my view, the fundamentals of our crisis response: a policy mix where building a stability culture and pursuing structural reforms supportive of growth and jobs go hand in hand,” said Olli Rehn, the E.U.’s Commissioner for Economic and Monetary Affairs.

The markets, desperate for a bit of good news in Europe, are now hoping for more: investors are more bullish on euro-zone equities than at any time since January 2008, according to a monthly fund managers’ poll from Bank of America Merrill Lynch. But a better European stock market presupposes continued economic growth. And if you look closely as the last quarter recovery, it’s built on shaky foundations, like a one-off weather-related rebound (German and French construction picked up after a long, slow, cold winter), as well as a boost in export demand from outside Europe that German manufacturers themselves say probably won’t continue. Credit is still tight, which will constrain business investment, and while consumer spending has picked up a bit, French and German shoppers can’t make up for a lack of demand in countries like Spain, Italy and the Netherlands, which are still in recession. Meanwhile, some 20 million people in the euro zone are still out of a job — a record 12.1%. That’s unlikely to change anytime soon.

(MORE: How Germany Can Save the Euro)

The problem is as it always has been: an unresolved debt crisis precipitated by an E.U. built on faulty foundations. As I explained recently in a TIME magazine article about how Germany must save the euro to save itself, austerity hasn’t worked at all — and bailouts have merely papered over the fact that the E.U. isn’t an integrated economic union, but rather a collection of states operating on two speeds, with no integrated fiscal policy. “The return to modest rates of economic growth in the euro zone as a whole won’t do much to address the deep-seated economic and fiscal problems of the peripheral countries,” wrote Jonathan Lyons, chief European economist of London-based Capital Economics, in a note to clients. “Indeed, stronger growth in the core could even have some negative effects on the periphery by maintaining an undesirably strong euro and deterring the European Central Bank from providing further monetary stimulus.”

And of course, there’s still nobody talking about the elephant in the room, which is the fact that Germans will need to go much further in shifting toward a consumer-spending and higher-income model, even as southern European countries work on reforming their labor markets and trimming their budgets.

While commissioners in Brussels and politicians in Berlin are lauding the so-called recovery, the truth is that Europe won’t be out of the woods until it makes real, lasting structural changes, like creating a banking union, underwriting euro bonds, and moving toward a real fiscal union in which both core and peripheral countries shift toward an economic middle, rather than everyone trying unsuccessfully to emulate Germany. The recession may be over, but Europe’s deep-seated economic problems, along with its slow-burn debt crisis, most certainly are not.

MORE: Is Europe’s Economy Finally Showing Some Signs of Life? Don’t Hold Your Breath