Is Europe Back on Track?

Date: February 28, 2014

Is Europe Back on Track?

After more than 5 years of economic doldrums, could Europe finally be on the verge of a return to sustainable growth?  Recent indications provide encouragement and suggest that maybe – just maybe – the answer could be yes.

Managing to finally emerge from recession in mid-2013, the Euro zone is now growing at a solid, if not spectacular, rate of 1.1% on an annualized basis. Germany, the largest European economy, is growing at an annualized rate of 1.6%, while enjoying record low unemployment and strong demand for its exports.

France benefited from a boost in household spending and business investment in the last quarter of 2013, which pushed the economy back above its pre-crisis levels. Meanwhile, across the English channel, growth in the UK last year was at its strongest levels since 2007, and according to a recent survey by the Confederation of British Industry, optimism in the all important services sector is at its highest levels since 1998.

The pace of growth is even starting to improve, albeit modestly, in several countries which not long ago appeared to be on the precipice of meltdown:  Portugal, Spain, and Italy.

Encouraging region-wide trends are also evident in critical industrial sectors, such as automotive – a sector which was especially hard hit during the slowdown.  Ford Motor recently reported that sales in its most important 20 European countries rose 9.2% in January over the previous year, and  growth in the manufacturing sector overall is expanding at it fastest rate in years across the Euro zone.

Reflecting a new-found sense of optimism, the European Commission recently made a slight upward revision in its projected growth rate for the Euro zone, and is now calling for 2014 region-wide growth to register a rate of 1.2%.  EU Commissioner Olli Rehn went so far as to opine that “the worst of the crisis might now be behind us”.

Other encouraging prospects appear on the horizon.  A successful conclusion to the massive US-EU trade deal known as the Trans-Atlantic Trade and Investment Partnership, while unlikely to be a panacea, would provide some additional impetus to the recovery. Although tariffs between the US and the EU are already fairly low on an overall basis, a host of regulatory obstacles continue to impede Trans-Atlantic trade, and clearing out this under-brush is likely to provide a solid boost to exports. And with growth rates in the US projected to flirt with the 3 percent mark, European exporters are likely to find stable demand for their products. 

While all this is encouraging, any sense of optimism over these nascent signs of recovery should be moderated by a fair dose of clear-eyed realism. It is not quite time to pop the Champaign corks.  The overall EU GDP is still 3% lower than its 2008 peak, and specter of deflation – which helped produce a “lost decade” in Japan – cannot be dismissed.  And while the region has returned to growth, the rates are so tepid they will not even begin to dent one of Europe’s most intractable problems:  stubbornly high unemployment –roughly 12% on a regional basis, but over 25% in some of the peripheral economies.

The world beyond Europe’s shores could also complicate the continent’s recovery. Given China’s growing importance both as a trading partner and a source of FDI, any stumbles in the world’s second largest economy would be felt acutely in Europe. With China’s leaders now attempting to navigate the tricky transition from an export led growth model to a domestic demand-driven economy, super-charged Chinese growth can no longer be assumed, and a pronounced slowdown in China could be sufficient to throw a spanner into the works for Europe’s budding rebound. Looking West rather than East, it remains to be seen if the US Federal Reserve can successfully extricate itself from its unprecedented quantitative easing program without torpedoing growth.  Europe’s “American cousins” are not out of the woods yet either.

Encouraging “green shoots” of growth are now undeniably beginning to emerge in Europe, providing reason for both hope and optimism. This is welcomed. But the modesty of the recovery and the fragility of its sustainability should temper any celebrations.  For now, keep the Champaign on ice.

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