France and Germany say goodbye to the recession

British economists, who have long been claiming that the UK is best placed to weather the global economic downturn, are being forced to eat their words this week, as the eurozone's two powerhouses – Germany and France – have broken out of recession.

In the three months to June, each nation recorded a 0.3 percent rise in gross domestic product (GDP), while the UK's economy contracted by 0.8 percent. The increase in second-quarter economic activity means that, overall, the 16-country eurozone contracted by only 0.1 percent. The wider eurozone of 27 countries – which includes the UK and a host of hard-hit Eastern European countries – saw a decline of 0.3 percent.

The reasons behind this imbalance between the UK and its two European rivals vary. The ‘cash for clunkers’ schemes on the continent seem to have offered a stronger impetus to consumer spending that the one introduced in the UK. On top of that, Germany's job subsidies to employers, aimed at preventing mass redundancies, have lessened the impact of the massive drop in demand for the country's manufactured goods on unemployment.

Both France and Germany differ structurally from the UK, in that they are not as dependent on financial services, they tend to have lower levels of consumer debt and have initiated long-term alliances between banks and businesses which guarantee that credit is not made unavailable at the first sign of trouble. UK banks have stockpiled the extra money made available to them through the Bank of England's quantitative easing programme and have heightened the difficulties in the corporate sector by making working capital scant and costly, laying bare the pitfalls of Britain's financial culture.

While the reports from France and Germany are welcome good news – they caused a surge in share and commodity prices – they do not automatically mean that the eurozone is well on its way to recovery. Despite their size, these two countries could not prevent the eurozone as a whole from contracting by 0.1 percent in the second quarter. And as unemployment in the UK jumps by 220,000 in the same three months, it is unlikely that we will be seeing many happy faces here for some time yet.

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