Eurozone’s recovery is brisk, so start worrying about it
PARIS — Europe’s economy keeps recovering at a brisk pace, but that shouldn’t lure governments into complacency: Much remains to be done to shield Europe against future shocks.
This is the takeaway from the Autumn Economic Forecast of the European Commission, which bumped up its growth estimates for the eurozone to 2.2 percent for this year and 2.1 percent for 2018.
That in turn should help those in EU government circles who argue that monthly repetition of good economic news provides the best opportunity to carry out reforms away from the pressures of life-defining crises.
The Commission joins others, such as the International Monetary Fund, which already projected a better performance for the eurozone and the EU’s economies than was expected at the beginning of the year. Indeed, Thursday’s revisions were only impressive compared to the Commission’s last forecast in May, when it expected eurozone growth for 2017 at 1.7 percent.
The Commission’s economists explained at length their reasons for optimism in their detailed report, many of which have to do with the new wave of optimism among European consumers and businesses. Country-specific factors also played a role this year — such as economic reforms bearing fruit in Spain and Portugal, domestic demand picking up in Germany on top of the country’s habitually strong exports, and the beginning of the implementation of Emmanuel Macron’s reform plan in France.
“Our generation will not have the luxury just to manage Europe. We will have to refound it” — Emmanuel Macron
Moreover, the overall political climate has reduced “long-term uncertainty,” as the Commission puts it. Translation: Populism on the Continent isn’t as bad as once feared.
Look closer, however, and it’s clear that even though the recovery has been going on for more than four years, major uncertainties remain and not only because of potential external shocks such as, say, a worsening of the North Korean crisis, as the Commission noted.
True, geopolitical risk looms large, and tensions in many parts of the world — whether Iran, Ukraine or Syria — could compromise the global recovery that partly underpins the eurozone’s. But closer to home, nothing in the recent improvements in Europe’s overall economic picture looks irreversible.
To begin with, the recovery itself has weaknesses. At around 2 percent, the expansion is back in line with the monetary union’s growth rate in the first 10 years of its existence before the financial crisis hit in 2008. But unemployment remains high in the region, wages are stagnating, and productivity is only growing slowly.
What’s more, the recovery stems in large part from the European Central Bank’s monetary policy, which has been loosened in the past five years through so-called “quantitative easing.” The ECB has opted for a gradual way to phase out its policy. But its task is made more difficult by the euro’s appreciation, which makes European exports more expensive, dampening the recovery.
Then there’s the state of Europe’s banking sector, still saddled with the legacy of bad loans in some key countries, compromising bank profitability and hindering further lending. The Commission doesn’t name the country highest on the list of eurozone policymakers’ concerns — Italy. But the state of the banking sector there, coupled with the possibility of a difficult election season next year, is a reminder of the potential economic risks still looming, especially if interest rates start rising faster than expected.
French president Emmanuel Macron | Oliver Weiken/EPA
Listening to French and German policymakers these days, it seems clear that they’re well aware of the challenges and are intent on consolidating the eurozone’s capacity to weather future shocks.
So far, little progress has been made toward the compromises they need to achieve to fix the single currency bloc — whether on consolidating the banking union or reforming the eurozone’s bailout instrument, the European Stability Mechanism. But as a French government official recently noted, the new German government isn’t formed yet “and what’s important for now is that no firm lines in the sand be drawn on either side.”
Once a government is formed in Berlin, expect France’s Macron to push hard the line he described this week in an interview with TIME magazine.
“The worst would be just to consider that Europe is a club where you fix short-term crises. That is no more the case. Our generation will not have the luxury just to manage Europe. We will have to refound it.”