The good news is the not so bad news

Even the weakest signs are being hailed as the stirrings of a recovery, writes Jack Ewing.

Even the weakest signs are being hailed as the stirrings of a recovery, writes Jack Ewing.

This is what passes for good economic news in Europe: Spain just added 265 jobs. "Clearly encouraging," the nation's Prime Minister, Mariano Rajoy, said of the development.

Never mind that nearly 5 million people in Spain are out of work. The latest unemployment report from the government this week was held up by Rajoy as a sign that maybe the economy is improving.

Nearly six years after the financial crisis in the US spread across the Atlantic, plunging Europe into recession and, in some places, desperate depression, "good" is relative. Economic figures that would be considered disastrous elsewhere are being held up as really not so bad at all - the first tender shoots of a recovery that is out there somewhere.

Or perhaps not. Politicians everywhere rarely tire of talking up the economy. The question is whether the supposed good news that European leaders are trumpeting is merely convenient cover. The risk - not only to Europe, but to the rest of the world - is that they are simply hoping they have done enough to restore growth, and that the hard decisions some say must still be made can be pushed into the future.

On Thursday, the European Central Bank left interest rates unchanged, defying calls for bolder action. Even so, bank president Mario Draghi highlighted the potential "downside risks surrounding the economic outlook for the euro area".

What few politicians acknowledge publicly is that many of the steps that economists say must still be taken are surefire vote-losers.

Liberalising rigid labour markets might spur growth and help young people break into the workforce, but it would surely alienate voters who end up losing jobs they thought they had for life.

"Policymakers have a strong interest in the current strategy's appearing to work," said Simon Tilford, chief economist at the Centre for European Reform in London. "Even the faintest glimmer of hope is interpreted as a sign of recovery."

Tilford said Europe was trapped in a Japanese-style malaise. "There's a surreal debate going on that if we don't do A, B or C there's a risk Europe will be like Japan," he said. "If you look at the data for the last six years, Europe is already worse."

The danger is that a sense of economic decline has become so ingrained that mediocrity is mistaken for excellence and the status quo marketed as a forward march. Germany, the economic envy of Europe, is expected to grow a mere 0.3 per cent this year .

Financially, Europe looks less risky than it did a year ago, when fear was rampant that the euro might fall apart. Bond markets have calmed down. Unemployment is declining, albeit very slowly, in a few countries such as Spain and Ireland.

During a visit to Athens last week, the Dutch Finance Minister said he detected "the first signal of a turn in the economy". Then, on Wednesday, news arrived from Brussels that the Greek economy was indeed getting better. It shrank only 5.3 per cent in the first three months of the year, an improvement on the 5.7 per cent fall in the previous quarter.

The financial markets, which have bounced back from their lows, don't fully capture the economic pain many Europeans feel. That is because financial markets ride on hope and look forward, not back. Germany's benchmark DAX index has risen 39 per cent in the past year, even though the economy is hardly humming along.

The eurozone economy has been shrinking for a year and a half, and the Continent is less wealthy than it was in 2008. Governments are still under pressure to cut spending, even if the budgeteers in Brussels last week granted France, Spain, Portugal and four other countries a little extra time to get their books in order.

The consulting firm Ernst & Young published a survey showing that foreign companies investing in Europe created about 170,000 new jobs in 2012, an 8 per cent increase over 2011. But total foreign direct investment to Europe, including Britain and Eastern Europe, fell 36 per cent to $US293.5 billion - double the decline worldwide. Foreign businesses, in other words, remained deeply cautious about investing in Europe's future.

Even if the eurozone economy does stop declining, that does not mean it will grow. It could simply hit bottom and stay there.

If that happens, there may be few easy options.

Political leaders have little choice but to continue the laborious task of remaking their economies so that they can compete in world markets and create jobs.

"There is still more work to be done," said Martin van Vliet, senior eurozone economist at ING Bank in Amsterdam. "Countries will have to make new reforms, and those are very unpopular."

How will we know when the eurozone is really on the mend? The true measure is jobs, van Vliet said.

When real employment growth resumes in southern Europe, "then I am willing to declare the worst is behind us", he said. "Until then I am not so sure."

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