Europe trying to boost economy amid possibility of Trump becoming president
If the new forecasts are correct, the next few years will be difficult for the European economy.
Despite the European Central Bank (ECB) cutting interest rates for the third consecutive time on Thursday, saying inflation reduction was “well on track”, the outlook for growth is less bright.
“The element that has changed is the downside risk, particularly the downside risk to growth,” ECB President Christine Lagarde said. He announced a further cut in interest rates across the bloc by up to 3%.
The bank said surveys indicate growth is slowing in the current quarter and a recovery hinges on consumers spending more and businesses increasing their investment.
It cut its growth forecast for the eurozone economy next year to 1.1% from 1.3% expected in September.
And these forecasts do not include the impact of Trump imposed tariffs on trade These are on the horizon, following the inauguration of the US President-elect in January.
The market now expects a sharp cut in rates next year.
The main short-term challenge is that the Eurozone’s twin engines are not working.
Germany is facing a structural challenge to its entire economic model. High energy prices, high labor costs, the need to bear greater defense burden, and complexities in China’s dependence on capital goods exports have weakened 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 divided French voters into three hard-to-reconcile factions, making the country difficult to govern.
The upcoming German federal election could provide a mandate for decisive change. Or might Germany’s economic challenge be complemented by French-style uncontrolled political gridlock?
There are some bright spots in Europe.
Spain could become the world’s fastest-growing advanced economy, rivaling 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 better performing countries. The so-called “pigs” are flying.
But there is a broader canvas here. The structural underperformance of the European economy against a rapidly growing tech-fueled and cheap energy-driven US requires some tough political decisions.
Much of this was brutally outlined in a report by former Italian Prime Minister and ECB President Mario Draghi, which said the EU was facing a “existential challenge” unless it leads to a massive increase in investment And reforms its industrial policy.
There is little sign that major European governments have the political capital to undertake these reforms. And all this comes before the arrival of a US President who wants to act against jurisdictions that he argues will “take away” the US, including the EU.
There is a big risk for Europe in the next few months.
