The eurozone strikes back – why Europe is booming again
It was a story few predicted: the eurozone is growing faster than the United States. When Jean-Claude Juncker gave his annual state of the union speech on Wednesday last week, Europe’s booming economy was near the top of his list. Ten years since the crisis struck, “Europe’s economy is finally bouncing back,” the European commission president told MEPs. Detailing the economic resurgence, but also referring to the EU’s newfound unity after Britain’s vote to leave, Juncker declared: “the wind is back in Europe’s sails”.
In fact, growth in the 19-country eurozone has quietly outshone the US for the last two years. The latest annualised growth numbers show the single currency bloc grow-
ing at 2.3%, compared with 2.2% for the world’s largest economy. Eurozone unemployment has fallen to the lowest level since 2009, while factories are humming again, with production up 3.2% on last year.
The upturn in fortunes is likely to continue, says James Nixon, chief European economist at consultancy Oxford Economics. “The euro area has done a lot of work over the last decade to get its house in order and also a lot structural reform. That has been an extraordinary, excruciatingly slow process but it is starting to bear fruit.”
The eurozone might be doing better, but the crisis has left deep scars and many wounds are far from healed. In France, the economy is expanding at an annualised rate of 1.7%, fuelled by confidence in French president Emmanuel Macron and his reform agenda, but growth continues to lag the eurozone average. Germany’s economy remains solid, but Germans are increasingly worried about inequality and lowwage jobs. Spain has bounced back from the crisis, but inequality is rising and unemployment remains painfully high at 17% - second only to Greece. Italy’s economy is doing better, but worries remain over its heavily indebted banks.
Despite the rapid pace of job creation, eurozone unemployment remains high (9.1%), worse than the EU average (7.7%) and the US (4.3%). Eurozone economies would need to be expanding faster to generate steeper falls in unemployment, says Cinzia Alcidi, head of economic policy at the Centre for European Policy Studies. “The outlook for the euro area has improved a lot but we are still closer to 2% than 3% [economic growth] so the effect [on unemployment] will be milder and will take more time.”
This explains why eurozone watchers are focused on economic reforms. Above all they are looking at whether Macron can succeed in pushing through far-reaching labour reforms to make it easier for small and medium-sized firms to fire workers, thus boosting hiring. French ministers believe such reforms will make it easier for the young and low-qualified to break into the labour market. If France succeeds, pressure is likely to build on Italy to undertake similar measures.
“It is possible that, in this framework this could be the start of a decade-long period of expansion, golden years for the euro area,” argues Nixon.
European leaders also want to push on with eurozone reforms. Two days after the German elections on 24 September, Macron is expected to set out a detailed blueprint of his ideas, which include a eurozone finance minister and parliament. “Either the eurozone moves from being an imperfect monetary union to a true economic continent, or it could disappear,” finance minister Bruno Le Maire told the Financial Times last week.
But there are differences on the detail. “There is a certain alignment in the broad ideas, but... divergences on how to make this happen,” says Alcidi at CEPS. “French ideas could be much more ambitious than Germany could accept,” she says. Differences are likely to emerge over the size of a eurozone budget or what it should be used for.
Beyond shoring up the eurozone, the EU is also pressing ahead on trade: the election of Donald Trump on an “America First” ticket helped bring the long-discussed EU-Japan trade deal closer to the finish line. This week Juncker said the commission wanted to start trade talks with Australia and New Zealand - perhaps one in the eye for Brexit dreams of “Canzuk”, a trading alliance of English-speaking commonwealth countries.
“The UK position is looking very, very lonely,” Nixon says. “The UK argument, to a certain extent, has always been that we didn’t want to be part of what looked like a failing club and I always felt that was a very Anglo-Saxon jaundiced way of looking at things [that underestimated] the political commitment to making this fly.”