The European Commission on Thursday (11 May) revised upwards its growth forecast for this year and the next, despite the difficult break-up negotiations expected between the EU and the UK, and the long list of challenges affecting the bloc.
“The first message is ‘good news’”, Economic Affairs Commissioner Pierre Moscovici told reporters yesterday during the presentation of the Spring Forecast. In this fifth year of the recovery, he said that all member states will grow over the next two years.
Europe still faces an important number of threats. But Moscovici highlighted the growing confidence among households, the gradual recovery of global activity, and the “substantial number of jobs” created.
As a result, the Commission improved the GDP outlook for the EU. The bloc is expected to grow 1.9% in 2017 and 2018, the period during which the Union expects to conduct the bulk of the Brexit talks.
In February, Brussels forecasted 1.8% of GDP growth for both years.
The eurozone is expected to grow by 1.7% this year and 1.8% the next one.
The sluggish investment levels continue to worry many in Europe. Despite the ECB’s massive monetary stimulus, and the Juncker Plan, Moscovici noted that investment is held back by the high levels of public debt, banks’ efforts to improve their balance sheets, and high political uncertainty, “although it is gradually disappearing in Europe”.
The “difficult and even confrontational” Brexit talks, as described by European Council President Donald Tusk, could still hamper investment “if uncertainty persists as a result of the difficult negotiations over UK withdrawal from the EU”, the forecast reads.
Moscovici warned of the obstacles inherited from the crisis, including the level of indebtedness and the “fragility” of some parts of the banking sector.
More balanced risks
Risks remain, but are more balanced than three months ago, including political ones.
“Despite political uncertainty started to disappear because of the result of the elections, and populism is not gaining ground in Europe, it still has an impact and investment and it will tend to disappear but only slowly,” Moscovici said.
But overall, he expressed an upbeat tone. Public finances will continue to improve, although slowly, because of the adjustment fatigue after years of austerity in the member states. The economic recovery is having a positive effect on employment, as the jobless rate is at its lowest since 2008.
“In the future, growth should remain stable,” the French Commissioner said.
Moscovici’s optimism contrasted with the more cautious stance of Marco Buti, director-general of Economic and Financial Affairs.
Despite the positive momentum, he said that the eurozone recovery remains “incomplete”, and it is not “sufficiently self-sustained” to withdraw the macroeconomic stimulus. Unemployment remains “high”. And the problems of the banking sector are not only hampering investment, but there could be a dangerous contagion between “weak banks” and the sovereign debt “in some member states”, he wrote in the foreword of the Spring Forecast.
“The tide of populist ideas in Europe may have turned,” he said. But “the sentiment of being at the losing end of technological innovation and globalisation that feeds populism is not gone”.
The recipe is to achieve “inclusive growth” by implementing “structural reforms 2.0”, meaning active labour market policies, high-quality education and measures to counter wage stagnation.