After nine years, the Eurozone’s combined GDP has finally climbed above its previous peak registered in the early months of 2008 before the onset of the global economic crisis. It is now climbing out of a trough that few thought could persist so long. For the first time since the global downturn hit, all 19 Eurozone economies are expected to grow throughout the three-year period, from 2016 to 2018, according to projections from the European Commission.
Together these nations grew faster than the US economy last year at 1.7 per cent versus 1.6 per cent. Impressively, this is something that has not happened since 2008. Even Greece is coming out of its grueling recession, with forecasts stating its economy will grow at 2.7 per cent this year. Late last year its former economy minister Giorgos Stathakis said, “We are at a turning point at which we can say with certainty that we are leaving the recession behind us.”
The Eurozone economy ended 2016 on a bright note, rising 0.5 per cent in the fourth quarter after increases of 0.3 per cent in the previous two quarters. This year is building on that momentum, with surveys of manufacturers pointing to healthy economic conditions and sentiment in the region. The falling value of the euro continues to help fuel export growth. But hard-won improvements in economic fundamentals are threatened by looming political uncertainties. In major economies across the region, rising populism and nationalism threaten the fragile balancing act at the core of the common economy. The Netherlands, France and Germany, which together account for over half of the Eurozone’s GDP, are gearing up for general elections. The support for conventional centrist parties in these countries is softening, and same holds true for Italy, which could see an early election after the resignation of Matteo Renzi last year. Rising populism will likely play into the election debates, and while traditional parties are expected to retain power, the rise of populism could make them take a more nationalist stance to appeal to voters.
The smaller EU countries of Luxembourg, Ireland and Malta are expected to lead the region in growth this year. Larger players such as Finland and Italy will lag behind with growth rates of around 1 per cent. Spain is expected to outperform most of its peers by growing at 2.4 per cent, followed by Germany and France.
Official figures are expected to show continued reflation in the Eurozone in February, but that could fuel further criticism of the European Central Bank’s ?2.28 trillion stimulus programme of zero-interest funds that prime the pump of investment and spending.
In a meeting on February 2, European Central Bank President Mario Draghi tried to dampen fears that continued easy money would fuel too much inflation. He said he is committed to maintain quantitative easing to keep the system flush with cash. Some observers believe that Europe is actually in the middle of a new industrial revolution. Labelled Industry 4.0, it is an effort at “comprehensive transformation of industrial production through the merging of digital technology and the Internet with conventional industry,” according to German Chancellor Angela Merkel. Intended to reverse the region’s decline in industrialisation, it has the potential to transform the way goods are manufactured, creating even better quality, improved productivity and increased speed.
Some of it has already taken root, said Italian economist Filippo Taddei. “Figures on revenues and factory orders in the Italian industry sector show two new elements,” said Taddei. “First, we are registering a recovery in industrial production led by the domestic market. It is good news because it confirms the gradual recovery of the Italian economy and in particular the internal market as shown by growth in consumption and investment. Secondly, we see how the recovery in industrial production is concentrated on capital goods, an indicator of a long-awaited transformation of our production system. Finally, the process is in place thanks to the latest government decisions, which came to fruition in the last budget law through measures to support investment, part of the strategic initiative Industry 4.0.”
But former Finland Prime Minister Jyrki Katainen, now a European Commission Vice-President for growth, investment and competitiveness, said new long-term investment remains a challenge. “Currently, medium-to-long term investments in Europe are ?300 billion less than the medium-term average,” he told Italy’s Il Sole 24 Ore newspaper. “Economic uncertainties have been replaced by political uncertainties. To overcome this turn of events, we have to reduce uncertainties to encourage private investment.” And though growth is promising, Eurozone economies have lost almost a decade, with GDP numbers only recently reaching pre-crisis levels. Spain is now about even with its 2008 figure, while France is 4 per cent above it and Germany is 8 per cent ahead. In 2016, Italy was still 7 per cent below its 2008 figure. Home to some of the earliest advancements in a range of industries, Europe has been forced by events to face post-industrial decline and retooling. If successful, it could become a global anchor through rational policies. As the US reacts to political developments and China faces deep concerns over its currency and debt, it is Europe’s moment to take lead.