Commentary: Don’t bank on Europe for growth in 2019

Commentary: Don’t bank on Europe for growth in 2019

European leaders seem unprepared to counter significant downward pressure on the EU’s growth potential beyond 2019, says Mohamed A El-Erian.

A EU flag is seen outside the EU Commission headquarters in Brussels
A European Union flag seen outside the EU Commission headquarters in Brussels, Belgium November 14, 2018. (File photo: REUTERS/Francois Lenoir)

ABU DHABI: The European Commission, the International Monetary Fund, and the OECD predict that, on average, the European Union’s economy will grow by 1.9 per cent next year, a rate that is broadly consistent with the average of 2 per cent expected for this year.

But the picture this paints may prove to be overly optimistic, not only because the growth rate itself is likely to disappoint, but also because there is significant downward pressure on the EU’s growth potential beyond 2019 – pressure that, at present, European leaders seem unprepared to counter effectively.

PAINFUL PROBLEMS

If the EU were a soccer team, it would not lose games for lack of a game plan or due to inadequate capacity. Worth nearly US$19 trillion, the EU’s economy remains the world’s second largest, constituting about one-fifth of the global output.

The problem is that the team as a whole is not playing cohesively, and all of the top players are struggling individually, owing to messy problems at home.

Over the last year, small steps – such as strengthening the collective financial safety net – have been taken to enhance the EU’s overall capacity to handle bumps in the road. But the economy’s overall architecture remains incomplete.

The problems are particularly notable in the eurozone, which is challenged by slow progress on banking union, inadequate fiscal-policy coordination, and political divisions.

READ: The problem with the Eurozone? Shared responsibility is no responsibility, a commentary

And the forces of fragmentation will only strengthen. For starters, populist political parties and leaders are increasingly influential, having capitalised on widespread anxieties about identity and migration, together with frustration with mainstream elites, to win support, and even power, in many countries.

But the transition from campaigning to decision-making – whether within parliament or, as in Italy, within the governing coalition – has proved to be difficult for several of the anti-establishment parties, given their lack of comprehensive policy platforms.

Despite warnings from the European Union, Italy's parliament passed a budget law that includes
Despite warnings from the European Union, Italy's parliament passed a budget law that includes a 2.4% public deficit target for next year (Photo: AFP/PHILIPPE HUGUEN)

UNCERTAINTIES COMPLICATE DECISION-MAKING

Together with the election for the European Parliament scheduled for next year, this added layer of uncertainty complicates region-wide coordination and decision-making, at a time when many policymakers are already preoccupied with the as-yet-unresolved issue of Brexit.

As a result, they have even less capacity to dedicate to removing impediments to productivity growth and building a more agile economy capable of responding to rapid technological advances and changes in the global economic environment.

It doesn’t help that Europe’s liquidity environment is also becoming less supportive. Having already slowed its asset purchases, the European Central Bank is set to wind down its massive stimulus programme at the end of this year.

ECB President Mario Draghi has signaled that an interest rate hike is likely to follow by the end of his term, in October 2019.

READ: Germany’s Angela Merkel has left her mark, a commentary

FRAGMENTATION

While these factors threaten to exacerbate the challenge of fragmentation confronting the EU economy, even a disjointed team can secure a victory if its star players manage to perform strongly enough.

Unfortunately, domestic issues that defy simple solutions and constrain both national and European policymaking are roiling many of the EU’s biggest economies – France, Germany, Italy, Poland, Spain, and the United Kingdom.

France is being shaken by the “Yellow Vest” protests against President Emmanuel Macron’s reform agenda. Germany is facing a deep political transition, as Chancellor Angela Merkel prepares to retire at the end of her current term.

READ: The yellow vest, a symbol of a rising political movement in France, a commentary

Protesters wearing yellow vests, a symbol of a French drivers' protest against higher fuel pri
Protesters wearing yellow vests, a symbol of a French drivers' protest against higher fuel prices, attend a demonstration in front of the Negresco Hotel ahead of a nationwide protest, in Nice, France, November 15, 2018. (Photo: REUTERS/Eric Gaillard/Files)

And Italy’s populist government is at loggerheads with the European Commission over its proposed 2019 budget, which is also based on optimistic assumptions for GDP growth.

As for Poland, its government has embraced so-called illiberal democracy, and is pursuing policies that many view as inconsistent with the EU’s values and vision. Spain’s government, for its part, remains weak.

And in the UK, divisions within the ruling Conservative Party are hampering progress toward an orderly Brexit process, precluding meaningful pro-growth and pro-productivity policy initiatives.

READ: Zombie Prime Minister Theresa May lives to fight another day, a commentary

With these challenges unlikely to be resolved soon, Europe’s key growth engines seem set to lose steam throughout 2019. Meanwhile, policy efforts to promote the EU’s longer-term growth potential will probably remain the exception, rather than the rule. All of this will happen within an external environment that is less supportive, both economically and financially.

Already, the EU’s export engine is not powerful enough to offset weakening domestic drivers of growth. And yet exports are set to suffer further, as a slowing China undermines external demand.

Meanwhile, financial market volatility is likely to continue, amid slowing global growth, technical vulnerabilities, and the reversal of volatility-repressing monetary expansion, which included ample and predictable liquidity injections by central banks.

Despite the resilient trade data, analysts expect the US-China feud will hit growth in coming months
Despite the resilient trade data, analysts expect the US-China feud will hit growth in coming months. (Photo: AFP)

SERIOUS CHALLENGES

So the EU “team” is set to face serious challenges both in domestic play and international competition. But the news is not all bad: Technically, the EU has both the game plan and the inherent strengths it needs to perform.

The economy has recovered from the worst of the global financial crisis. A lot of work has been done to identify the policy steps required to achieve strong and inclusive growth, reduce financial vulnerability, and stop the erosion of the pillars of longer-term prosperity.

And the EU has considerable untapped or underused internal capabilities. Unleashing them in the context of a coordinated strategy could improve the EU’s economic performance and prospects considerably.

Success will require political leaders who are capable of inspiring the public and willing to pursue consistent pro-growth policy initiatives. The longer it takes for such leaders to emerge, the more difficult it will be for the EU to avoid a relegation battle.

Mohamed A El-Erian, Chief Economic Adviser at Allianz, was Chairman of US President Barack Obama’s Global Development Council and is the author of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.

Source: Project Syndicate/sl

Bookmark