After an arduous winter, a green and leafy economic spring has arrived in the eurozone. Good news about growth is diverse and widespread. Output grew at 1.7 per cent in 2016, faster than the US, and forecasters hope for similar, or even better, in 2017. In the first quarter, the EU outgrew the UK. Unemployment is at an eight-year low.
A few years ago, severe deflation was a persistent worry. Now inflation is at the European Central Bank’s target of just under 2 per cent. Manufacturing surveys are strengthening steadily. Economic confidence is near pre-crisis levels. The list of goodies goes on.
Economic momentum is always fragile, where it exists at all. The global upswing, of which the eurozone revival is an important part, does not have deep roots.
And, as ever, the possibility of a grievous self-inflicted injury cannot be ruled out. The easiest risk to see is that Marine Le Pen comes to power in France, putting protectionism and nationalism on the policy agenda of the bloc’s second-largest economy. This is not likely, but is absolutely possible.
Then there is the risk that central bankers and politicians withdraw the policy supports that led to the thaw. Previous mistakes must not be repeated, and policies that are working should be sustained. The key mistakes were the ECB’s premature tightening of monetary policy in 2011 and a period of co-ordinated fiscal tightening that began in earnest that same year and deepened in 2012. Withdrawing monetary and fiscal support from a still- wobbly economy, when banks were licking their wounds, was a mistake.
Looser money, the end of fiscal tightening in 2014, and the initiation of quantitative easing - government bond-buying - in early 2015 have reversed some of the damage.
Since these programmes began, credit conditions have loosened across the eurozone and loan volumes have increased.
This has been a particular help in the eurozone’s periphery. Spain, to take the most important example, made some hard choices with regards to its struggling banks and labour market reform. It is now reaping the benefits.
The economy expanded by 0.8 per cent in the latest quarter, its 15th consecutive quarter of growth. The broad recovery should make a final deal between Greece and it creditors easier - progress on this front came last week - as the country is no longer an existential threat to the single currency.
It is unfortunate that a few quarters or even years of economic growth is not enough to reduce the threats posed by populism and nationalism. It is an unhappy feature of modern economies that gains and losses tend to be spread unevenly, and in any case the connection between economic strain and political irrationality is at best a very long-term one. Ms Le Pen will not go away because of one more loss at the polls. Still, there are things that European leaders can do to consolidate and extend recent successes.
Other than doing no harm - that is, not reversing policies that are working - it is crucial that policymakers use the flexibility created by better growth to pursue structural reforms that are impossible while the economy contracts. Labour laws need further liberalisation. Many eurozone banks’ balance sheets, particularly but not exclusively in Italy, remain gummed up with bad loans that need writing down.
Most importantly, perhaps, the banking system needs a common deposit insurance mechanism, to go alongside common oversight and resolution regimes.
Full banking union will reduce the risk of another crisis, and open the way to the slow withdrawal of the supportive policies that have finally started to bear fruit.
