Reflections on the economic outlook for Europe

Reflections on the economic outlook for Europe

What is the outlook for Europe? This was a key topic at two conferences I spoke at last week: in Korea; and on the shores of Lake Como, featuring the Italian business elite and policy-makers from around the world.

The global economy is slowing. Financial markets are mixed about what lies ahead: equities signal a rebound in growth, bond markets expect recession.

The outcome is likely to be somewhere in between, with global growth weaker than last year but still strong enough to allow unemployment rates to fall. But economies may not have sufficient momentum of their own and will need to be helped by policy stimulus, as central banks reverse or postpone previous plans to tighten and pressure builds across many countries for more government spending or tax cuts. One debate in Italy was not whether central banks need to do more – there was agreement on that – but whether there was scope for greater fiscal activism, given high debt levels across the globe.

It is not just the immediate cyclical outlook that is generating uncertainty; so too is the longer term picture. More of global growth is coming from the Indo-Pacific region, stretching from India to the US. Within this, there is increasing focus on the G2 relationship between the US and China, whether it be the expectation of a resolution to their trade dispute now or how they might handle likely geopolitical tensions in coming years.

In contrast, no-one seriously talks about a G3, as Europe, despite its economic size, has the attributes of a slow-growth region whose share of the world economy continues to shrink gradually. Moreover, with elections to the European Parliament imminent, there is acute awareness of more oxygen being given to eurosceptic parties.

The main focus, though, in any debate about Europe is Brexit and what this means for not just the UK, but the Eurozone area. The image of Brexit from afar is not as good as it could be. Whether on the continent or in Asia, they witness political chaos and ineffective leadership in Westminster. Equally worrying is that the UK Government has not conveyed a positive global vision of what lies ahead. The confidence others have about Britain’s longer term potential is not matched, it seems, at home.

A worrying feature of the last two and a half years in the UK has been the lack of focus on the UK’s future domestic agenda, vital to making Brexit a success. Also lacking has been a focus on the challenges confronting the euro area itself. Its future direction of travel should have strengthened the UK’s negotiating stance. A theme in private discussion was how united the EU has been but how little the UK has tested this, in the face of obvious tensions, both across countries and within them as well.

In Italy, it was noticeable how much of a divide there is between the present government and business; perhaps this is not a surprise as Italy is the only Western economy where income per person is lower in real terms (that is after allowing for inflation) than it was in 2000.

Despite this, the view among delegates was that the European Central Bank (ECB) was doing a good job. This is despite the slowdown in the euro area last year being partially triggered by premature policy tightening by the ECB as it started to withdraw its stimulus as well as by a deceleration in global trade. There is some nervousness about what lies ahead, but the latest data suggests an apparent cyclical recovery in the euro area this year, with modest growth.

It was interesting to hear concern from some about the recent Franco-German summit meeting in Aachen. Also, it was noted how Germany was pushing its candidates for two of the top institutional positions, including head of the increasingly powerful ECB. Notable too is the German push for the euro area to adopt an industrial policy to take on China, based on Germany’s approach.

Problems within the euro area are all too often attributed to national factors and the solution put forward is usually for greater centralisation. One can understand this in the case of capital markets and banking union, which it is felt are being held back at the national level. In terms of the banks, there is little doubt the US and UK are in far better shape than the euro area.

There is a similar debate regarding competitiveness, which is seen as a national competence, with education and innovation two of the key drivers. An effective carbon tax was another example. One can sense that the age-old challenge is whether the centre needs to complement what goes on at a national level, or assume competency for it. The future direction of travel is clear, with increasing transfer of sovereignty from national to EU institutions.

An underlying key issue is how the UK and the euro area can position themselves best in the changing and growing global economy, and an increasing recognition that it will require more radical measures to try and break out of the slow growth phase Europe is in.