Brexit, Italy, trade: Risks are piling up for Europe

FRANKFURT, GERMANY >> Europe’s five-year economic expansion is facing a mid-life crisis as it copes with potential debt troubles in Italy, a U.S.-China trade war and the risk of a disorderly British exit from the European Union.

How those risks play out will decide whether the economic upswing that began in early 2013 and has created 9.5 million more jobs ages gracefully for several more years — or meets an early demise.

The economy of the 19 countries that use the euro stumbled in July-September, when quarterly growth halved to 0.2 percent. Some see that as a natural slowdown after much stronger, trade-fueled expansion of 0.7 percent at the end of last year.

But worries rose this week after new data showed Germany’s economy, the currency union’s largest, shrank 0.2 percent in the third quarter. Much of the fall can be attributed to delays faced by major automakers like Daimler and Volkswagen in getting cars certified under new emissions rules. However, a slowdown in exports also played a role, raising questions of how much more pain the U.S. trade war and uncertainties like Brexit could create for Europe’s many exporters.

Holger Schmieding, chief economist at Berenberg Bank in London, says that surveys of business activity “point to a further loss of momentum in late 2018.”

A key risk is the conflict between Italy’s populist government, which wants to spend more on social welfare, and the European Union’s executive Commission, which is demanding Italy lower its budget deficit under the rules that go with belonging to the euro. The danger is that if the Italian government persists in running larger deficits, its borrowing costs rise to unsustainable levels and the country is unable to roll over its debt at an affordable interest rate. Debt costs spiked in 2011 but fell after a reform-minded government took office and the European Central Bank promised to backstop the debt of countries that are facing high debt costs but show a willingness to correct their finances.

Italy is “the most serious risk facing the eurozone,” Schmieding says.

He says an Italian financial crisis could erupt next year, but that it is more likely that the country would muddle through until a new recession — perhaps

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