Daily Management Review

Issues Facing Europe Go Much Beyond A Brief Recession


Issues Facing Europe Go Much Beyond A Brief Recession
Though concerns about whether final growth data, which are expected early next year, will show a plus or minus sign in front, are ignoring the wider picture, it appears that the euro zone is in the midst of another recession.
The good news is that a severe contraction that could leave businesses, consumers, and banks with long-term damage is unlikely to occur within the 20-nation currency union. The bad news is that there isn't much to support a significant comeback; growth is essentially zero.
Significant economic headwinds will make 2019 difficult as well, and the euro zone may find it difficult to grow by more than 1% even in the event of a significant recovery.
Deep structural issues will inevitably cause Europe to lag behind the majority of other major economic regions for some time.
Though not excellent, the short-term prognosis is manageable.
Based on preliminary data released on Tuesday, the gross domestic product contracted by 0.1% from July to September of last year, suggesting a mild recession if the lacklustre fourth quarter continues to imply that it will.
However, growth has been essentially stagnant throughout the year, and a Reuters poll indicates that next year's increase will be limited to just 0.6% due to record-high interest rates, which are a result of the spike in inflation, and tighter budgetary expenditure.
Philip Lane, the chief economist of the European Central Bank, is among the optimists who believe that demand will rebound since workers are currently seeing a real pay rebound that will increase confidence.
External demand is probably going to be healthier as the job market is still tight and the global economy is starting to recover.
Others, however, point out that there is no evidence of the kind of confidence boost the ECB is hoping for, citing high borrowing costs that discourage investment, a deteriorating job market, and less than expected foreign demand.
"Europe has been through a year of zero-growth and is now heading into a year in which both monetary and fiscal policies are designed to put a brake on growth," UniCredit economics advisor Erik Nielsen said.
"The European economy has been flat on its back for a year (and) the monetary and fiscal policy plans for 2024 seem to accept the high probability of another lost year."
Even after next year, things still don't seem good.
Europe's population of working age is expected to decline while productivity increases are minimal. Companies lament that as bureaucracy grows, their competitiveness is diminishing, and the euro zone's attempt to become an economic union has faltered due to a lack of political will.
The potential growth of the bloc is presently estimated by the European Commission to be less than 1.5%, declining to 1.2% by 2027 from 2%–2.5% at the beginning of the century and mostly caused by changes in the composition of the population and insufficient efficiency gains.
"Many countries, where they were in the 1990s, they're behind that now. There's not been progress - there has been regress," the ECB's Lane said recently.
"Over time, various types of reforms have been cancelled, various types of reforms been unwound. This is an avoidable own-goal," he added.
In the meantime, potential growth in the US is estimated to be 1.8% and to remain stable.
There may be an additional peculiarity to the decline in working-age population in Europe. Businesses are currently holding onto employees because of fear that it will be tough to hire in the future. This is tightening the labour market more and may encourage pay rise at the expense of productivity.
"A structural shortage of qualified labour, aggravated by the demographic transition and skill mismatches, is prompting companies to hoard labour despite rising cost pressures and economic uncertainty," UBS economist Reinhard Cluse said.
Germany seems to be the main obstacle. Due to its reliance on external demand for development in its energy-intensive heavy industries, it is ill-prepared for the new reality of rising energy costs and trade tensions.
The greatest economy in Europe currently has a potential growth rate of less than 1%.
In the meantime, governments in the European Union are finding it difficult to agree on more important issues that will influence the course of events. These include whether a true banking union should be formed, how immigration could help with labour shortages, and whether or not centralised funding should be used to address problems throughout the 27-nation bloc.
"Rather than being satisfied with growth rates around 1.2% on average, let's be more ambitious," Lane said.