Trump’s policies could throw EU’s economic expansion ‘off track’, warns Commission

The European economy's growth remains "solid", but faces headwinds as May's European elections approach. [European Commission]

The European economy is expected to continue growing at a robust pace, but faces negative spillovers from the fiscal stimulus and trade restrictions adopted by US President Donald Trump, the European Commission warned on Thursday (3 May).

In contrast with recent forecasts, the Commission did not revise its figures for the eurozone upwards, signalling that growth is slowing down in the currency union.

“We take into account the slow-down for the last quarter. We think it is largely explained by temporary factors. But it does not change our outlook. Our economists are not renowned to be the most optimistic, but our analysis is that growth is solid and the phase of expansion that we know today is robust,” commissioner for Economic Affairs, Pierre Moscovici told reporters on Thursday.

The spring forecast predicts GDP growth of 2.3% and 2% in the eurozone for this year and 2019, as it was foreseen last February.

For the EU as a whole, output is now expected to accelerate by 0.2% more than previously forecast, and it will grow 2.5% this year and 2.2% in 2019.

ECB sees 'loss of momentum' in eurozone’s economic growth

ECB President Mario Draghi said on Thursday (26 April) that all eurozone countries experienced “some moderation in growth or loss of momentum” over the past weeks, as the institution is carefully reassessing how to exit the unconventional monetary measures adopted during the crisis.

After its Governing Council meeting last week, the ECB also concluded that there had been a “loss of momentum” in the euro area.

While the eurozone’s growth shows signs of slowing down, the US economy is picking up pace thanks to the tax reform adopted by Trump.

Both the euro area and the US grew by 2.4% last year.  But the American economy is expected to accelerate to 2.9% this year, before falling slightly to 2.7% in 2019.

Commission: Trump stimulus payment 'gonna be huge’ but inconsequential

The European Commission predicted in its winter forecast €226 billion in additional spending as part of the fiscal stimulus promised by the new US government, but its economic impact will be “very low”.

Trump’s fiscal stimulus has turned into a risk in Commission’s eyes, as it could amplify the  impact of the protectionist measures recently announced by the US President.

“The combination of procyclical fiscal stance in the US and inward-looking trade policies represent a dangerous nexus in our view,” Moscovici stressed.

The fiscal stimulus would boost short-term growth, but also raises the risk of the US economy overheating and interest rates being raised faster than initially assumed. Moscovici believes that there could be “significant spillovers” if the US Fed’s decision chills investors worldwide, destabilizing markets and financial conditions.

“Market volatility is likely to become more prominent feature in the future because of recent policy developments,” Moscovici summarised.

Moscovici 'not worried' about market turbulences, raises EU growth forecast

European Commissioner for Economic Affairs Pierre Moscovici said on Wednesday (7 February) he is not worried about the volatility seen in markets, as the Commission revised upwards its growth forecast to 2.3% this year and 2% in 2019, both for the eurozone and the EU as a whole.

The Commission also fears that the economic situation could worsen if the US trade restrictions undermine the viability of global value chains.

“The materialisation of these risks could throw the expansion off track in a European economy that has recently been more reliant on investment and exports”, wrote Marco Buti, the head of the directorate-general of Economic and Financial Affairs, in the preface to the forecast.

EU says metal tariffs 'prolong uncertainty' after US holds off

The European Union accused the United States on Tuesday (1 May) of prolonging “market uncertainty” with its decision to hold off on imposing controversial tariffs on metal imports from key global trading partners.

Good news

But despite the risks to the global economy having “sharply increased”, Buti said, the European economy is in a strong position to face them.

The number of employed persons is higher than ever. In addition, all eurozone economies will register a deficit below the 3% threshold this year for the first time since the financial crisis started a decade ago.

“This is an historic achievement,” Moscovici said.

Public investment is now expected to grow faster than GDP, although it still remains below the pre-crisis levels.

All member states will maintain strong economic growth this year and the next.

But in light of the recent indicators suggesting a slowdown to growth, Commission experts are assessing whether the loss of momentum is due to temporary factors, or there are limitations to growth.

The ECB’s governing council also spent four hours discussing this issue during its last meeting.

European fiscal board chief: 'Stop talking about recovery, we are approaching normality'

Arguably, the EU’s economic governance framework is one of the most divisive issues among member states and top priority in Europe’s to-do list of outstanding reforms. Niels Thygesen does not shy away from this challenge. After questioning European Commission fiscal stance for this year recommendation, he proposed a return to a more ‘prudent’ orientation for 2018. In October, he will address one of the hottest topics: whether the application of the Stability and Growth Pact (SGP) unfairly favoured countries like France.

“The well-known difficulties of assessing the cyclical position in real time are not just a matter of academic debate,” wrote Buti.

“Whether and when full capacity is reached is a key determinant for the growth and inflation outlook, and is crucial for the orientation of macroeconomic and structural policies,” he added.

Both the Commission and the ECB believe that the slowdown is temporary and partly responds to constraints in the supply side, for example,  the lack of labour force in sectors such as construction.

The EU executive says that these structural weaknesses should persuade governments to adopt policies to increase labour market participation, improve education, and remove bottlenecks to infrastructure.

But in order to be more resilient, the Commission, the ECB and some member states want to strengthen the bloc’s economic and monetary union by completing the banking union and setting up new fiscal instruments to cope with sudden economic shocks.

Europe’s reform push faces reality check

The impulse to bolster the eurozone, sparked by Emmanuel Macron’s victory in France almost one year ago, is losing its vigour as political instability persists and a group of countries have solidified their opposition to bold changes.

EU leaders promised that they would come up with decisions by June European Council, but officials have lowered the expectations in recent weeks. The most ambitious parts of the package, including a European Deposit Insurance Scheme for banks and a eurozone budget, remain elusive because of the opposition of a dozen member states.

Supporters of the reforms have argued that the positive economic momentum and political situation offered a window of opportunity to move ahead. “But when dark clouds already gather on the horizon the task becomes urgent” said Buti.

Macron offers half-hearted defence for waning eurozone push

Emmanuel Macron toned down his ambition of completing the Economic and Monetary Union in a speech to the European Parliament on Tuesday (17 April), as he appears to be losing Germany’s backing and faces mounting pressure at home on unpopular economic reforms.

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