Europe’s recovery won’t slide away on Greece, but it could slip up over oil




Oil prices closed at $123 a barrel on Friday, and the cost of petrol on Britain’s forecourts jumped to a record high. It was hardly the backdrop Europe’s politicians had hoped for as they gathered in Brussels to rubber-stamp their new tax and spending rules (while stressing that growth, not austerity, is their priority).

Just when policymakers and businesses were daring to believe that growth was returning, after the eurozone crisis hammered confidence at the end of 2011, they’ve got a different and more viscous enemy to worry about. As Stephen King, chief economist at HSBC put it, “oil is the new Greece”.

Even the most pessimistic commentators think the combination of the European Central Bank’s long-term repo operation, and the €130bn bailout for Athens – albeit with half the money held back for the moment – has bought the eurozone some valuable time.

The extra €1 trillion of three-year loans sloshing around from the ECB’s two interventions, in December and last week, has helped to avert the possibility of a full-blown credit crunch or a domino run of bank collapses for the time being. And the new loan to Athens will enable it to pay its bills for a while – though few believe that Greeks will ultimately put up with the penury to which they are being subjected.

But even as the flood of bad news from the eurozone abates for the time being, the crippling cost of commodities could choke off the recovery in Europe before it begins.

HSBC’s King points out that early in 2011, there was an optimistic mood abroad and forecasters were pencilling in a healthy year’s growth. Yet this renewed confidence, plus the cheap money that was the legacy of quantitative easing (QE) on both sides of the Atlantic, helped push up the cost of commodities such as oil and metals.

Even before the euro crisis reached its most dangerous phase last summer, these high commodity prices were depressing demand in the developed world – including from cash-strapped British families – and prompting the authorities in China, India and other emerging economies to tighten monetary policy to control inflation.

There are reasons to fear that oil prices could continue to rise this year, too: political tension in the Middle East over Iran’s purported nuclear ambitions has already led to increasingly tight sanctions on a key exporter of crude. Iran, for its part, has threatened to retaliate by shutting off the crucial supply route of the Strait of Hormuz.

At the same time, some of the new wave of cheap money from the latest round of QE by the Bank, plus the ECB’s repo operation, is likely to flow into commodities – after all, part of the way QE is meant to work is by pushing up the price of “other assets”. And thirdly, as King points out, there is a longer-term trend towards higher prices, as the balance of global growth shifts over time towards more energy-hungry emerging markets.

And high oil prices are exactly what the fragile economic recovery doesn’t need. In the short term, they feed straight through to high inflation, giving central banks a headache; but the west’s debt-burdened consumers are unlikely to be able to stomach those prices for long. So in the longer term, costlier energy will bear down on demand, knock confidence and hammer growth.

Germany led the eurozone into a downturn in the final quarter of 2011, and GDP contracted in the UK too, but there had been hopes more recently that the worst was over.

But if the upward pressures on the oil price continues, Europe’s strategy for economic recovery, such as it is, and George Osborne’s hopes that the UK will scrape clear of a double-dip, may soon be consumed by an oil slick.