Khaleej Times

Europe is turning around as economies grow faster

Political uncertaint­ies, however, loom large and could derail the progress in the wake of populist agendas

- Jon Van Housen & Mariella radaelli

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

The smaller EU countries of Luxembourg, Ireland and Malta are expected to lead the region in growth this year.

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. Jon Van Housen and Mariella Radaelli are editors at Luminosity Italia, a news

agency based in Milan, Italy.

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