The European economy is going to have a tough few years, if new forecasts are correct.
Despite the European Central Bank (ECB) cutting interest rates for the third time in a row on Thursday, saying that lowering inflation was “well on track”, the outlook for growth is less rosy.
“The element which has changed is the downside risks, particularly the downside risk to growth,” ECB president Christine Lagarde said as she announced a further cut in interest rates in the bloc, down to 3%.
The bank said surveys indicated growth was slowing in the current quarter and that the recovery depended on consumers spending more and businesses increasing their investments.
It cut its forecast for growth for the eurozone economy next year to 1.1%, from the 1.3% it had expected in September.
And these forecasts do not include the impact of the Trump tariffs on trade that are on the horizon, after the US president-elect’s inauguration in January.
Markets now anticipate a faster series of rate cuts next year.
The key short-term challenge is that the twin engines of the eurozone are not firing.
Germany is beset by a structural challenge to its entire economic model. High energy prices, higher labour costs, a need to shoulder more of a defence burden, and complications in its reliance on exporting capital goods to China have undermined every pillar of its growth and export miracle. Its totemic car industry now faces significant competition from Chinese advances in battery power.
France has been more successful economically, but President Emmanuel Macron’s reforms have split the French electorate into three difficult-to-reconcile blocs that have made the nation difficult to govern.
An upcoming German federal election could deliver a mandate for decisive change. Or could Germany’s economic challenge be supplemented by a French-style ungovernable political impasse?
There are some brighter spots in Europe.
Spain could be the fastest-growing advanced economy in the world, rivalling even the US, on the back of a tourism boom, ample access to workers and green investment.
The crisis countries of the 2010s – Portugal, Ireland, Greece and Spain – are now the eurozone’s outperformers. The so-called “PIGS” are flying.
But there is a wider canvas here. The structural underperformance of the European economy against a booming tech-fuelled and cheap energy-driven US requires some tough political decisions.
Much of this was rather brutally outlined in the report of the former Italian PM and ECB president Mario Draghi, which said the EU faces an “existential challenge” unless it vastly increases investment and reforms its industrial policy.
There is little sign that major European governments have the political capital to make these reforms. And all this occurs before the arrival of a US president who wants to act against jurisdictions which he argues “rip off” the US, including the European Union.
There are big stakes for Europe over the next few months.
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