After seven years of growth, the eurozone’s outlook is deteriorating. There is a risk of a recession if the trade war with Washington worsens, while member states continue to disagree over the completion of the economic and monetary union that would help them cope with a downturn.
The 20th anniversary of the euro was celebrated with lofty speeches last year but almost no gifts for the currency union. Indeed, the monetary bloc will start 2020 disunited in its goals, lacking a roadmap to move forward, and with a diminishing ambition among some of its key countries.
Its members were forced to leave major improvements off the table while low-hanging fruit, including the reinforcement of the European Stability Mechanism, the EU’s rescue fund, remained elusive because of domestic quarrels in Italy.
As the Europeans disregarded the calls to fix the roof while the sun was shining, time will be now of the essence as darker clouds are nearing.
The risk of a recession may increase as the economic slowdown is expected to continue and could even become a downturn if the trade dispute between Europe and the US worsens.
Against this turbulent backdrop, Europe will speed up its work to support its companies and protect them against unfair practices from abroad, particularly from China.
Following the “disappointing” progress made last year, in particular on the banking union, as European Commission vice-president Valdis Dombrovskis said in December, one of the first tasks for the eurozone finance ministers will be to agree on a roadmap to overcome the hurdles to bolster the euro area.
The priority list includes sealing the ESM reform and a European Deposit Insurance Scheme (EDIS) to protect savers across the region.
But progress on both issues became more difficult as the political situation in Italy and Germany became more unstable. The fragility of the coalitions in Rome and Berlin in 2020 will limit any room for manoeuvre, while the collapse of both governments remains on the cards.
“The EU has to prepare for the next crisis,” said Eric Maurice, head of the Brussels office of the Schuman Foundation. “Unfortunately, the weakening of the coalition in Germany will probably hinder any progress,” he added.
Moreover, the reform path turned more complex after new elements were added to the mix.
Germany is pushing for forcing banks to add more capital against the sovereign debt exposure in their books in order to lift its veto to EDIS. But member states, including Italy, want in return a euro safe asset if national debt will be ‘penalised’. Although eurobonds remain a long shot, a synthetic version pooling various sovereign debt obligations could be an option.
Italy said it would sign off on the changes made to the ESM to increase its powers to bail out eurozone countries only when progress is achieved on the completion of the banking union. The first attempt was blocked by Rome in December, following Lega leader Matteo Salvini’s abrasive campaign against the ESM reform, in particular to facilitate the renegotiation of future debt obligations.
EU leaders will also agree on the funds for the budgetary instrument for convergence and competitiveness (BICC), the watered-down version of the eurozone budget. The funds will be part of the multi-annual financial framework (MFF) negotiations, the EU’s long-term budget for 2021-2027, and could total around €12.9 billion, according to a proposal made by the previous EU’s rotating presidency held by Finland.
The BICC’s firepower for seven years is far from the eurozone budget of “several points” of the region’s GDP envisaged by France. But member states left the door open to provide additional funds outside the MFF.
The trade front will keep the Europeans in 2020 even busier than in the previous year. On the one hand, they will have only 11 months to agree on a future relationship with the UK before the end of the transition period. On the other hand, they will face further tensions with US President Donald Trump, who has threatened European goods with new tariffs.
Against this turmoil, progress on the World Trade Organisation reform will be hard. Reaching an agreement on an investment deal with China by the end of the year, as planned, will be also very demanding, given the snail’s pace of progress over the past years.
The tight calendar to agree on at least the basic pillars of the future EU-UK relationship will likely force an extension of the negotiation period beyond December 2020, as suggested by Trade Commissioner Phil Hogan.
Meanwhile, the tit-for-tat tariff dispute with Washington could worsen as early as in January. The Trump administration will decide on whether to impose tariffs on French products, including wine and luxury goods, in response to France’s digital tax. Europe has warned it would retaliate if the US approved new duties.
Later this year, the WTO will confirm the compensatory tariffs the EU can impose on US goods, in response to the subsidies given by Washington to Boeing.
This will bring to an end the 15-year long Airbus-Boeing dispute, but could further exacerbate the tensions between the two largest trading partners. With the US election due in November, Trump could decide to finally impose tariffs on European cars in order to attract more votes.
If that happens, the European economy “would likely fall into recession”, warned Maria Demertzis, deputy director at Bruegel think tank.
Europe registered its seventh year of consecutive growth in 2019; employment figures hit record highs and public deficits are under control. However, indebtedness remains high, output has lost its vigour, productivity is not improving and the European economy is facing a transformation to become greener and more digital.
Both the European Commission and the ECB already revised downward their growth forecasts for the eurozone in 2020, to 1.2% and 1.1% respectively.
The outgoing Economy Commissioner Perre Moscovici warned in November that the European economy was entering “a new regime”. For the first time, the region’s GDP was not expected to rebound within the two-year horizon. As the picture became bleaker, “we must be prepared for all scenarios,” Moscovici said.
If the car tariffs finally trigger a recession, member states with healthy economies, especially Germany, will be under pressure to launch major investment plans to stimulate the economy and come out of the ditch.
An industry for the future
In another challenge, while Europe deals with trade and economic tensions, it should also redouble its efforts to catch up on the digital front with US and Chinese firms.
The solution would not be allowing for mega-mergers, similar to the banned Alstom-Siemens operation, but rather a more complex mix including a new long-term industrial strategy, and other initiatives to enhance Europe’s technological sovereignty, and to support cross-border high-tech projects.
In addition, Europe is planning to bolster its defences against third-countries’ unfair practices, including distorting subsidies. The EU is discussing a review of its public procurement rules and strengthening the European Commission’s powers to address distorting behaviours, especially from China.
Although some proposals will come already in 2020, others may take more time, including a review of the market definition. This review could ease the conditions for certain merger approvals, but EU officials have explained that changes would focus primarily on the digital sector.
[Edited by Zoran Radosavljevic]