European elections amid a looming economic storm

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

This article is part of our special report European economy: On the road to recovery or still in stagnation?.

The slowdown of Europe’s economic growth and the risk of a new recession if the ongoing trade war worsens could steer the political agenda in the run-up to next May’s European elections.

When voters went to the ballot box in the last European elections in 2014, the EU economy was coming out of the woods after suffering the most severe recession in the history of the Union.

But if member states were coming out of the hole in 2014, this time around they may be nearing a new one.

Institutions, analysts and economists agree that European output is losing steam. Following a better-than-expected 2017, the economy is slowing.

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.

The alarm bells are not sounding yet, because the engine of internal demand is still working.

But an increasing choir of voices are starting to point to 2020 as a critical year when this expansionary cycle may come to an end.

It could be before, an EU source pointed out, if external risks, in particular, the global trade war deployed by US President Donald Trump, continue to worsen.

Trade war starts to dent European growth

The European Commission cut expected EU growth for this year by 0.2% compared to its forecast less than three months ago, as output was weaker than expected during the first semester and external risks, especially the trade war, are on the rise.

In 2014, the EU economy grew at 1.8%, and the eurozone at 1.4%. Next year, the EU 27 countries (without the UK) are expected to grow at 2.1, according to the European Commission forecast published in July.

The EU executive revised downwards expected grow for this year and the next, given that the economy is starting to decelerate and the trade dispute is already denting global growth.

“I don’t want to underestimate downside risks, they undoubtedly exist”, especially the trade disputes, but “we are still on this cycle of expansion so we are not expecting any kind of catastrophe”, the Commissioner for Economic Affairs Pierre Moscovici commented in July.

The raw economic numbers are promising. All European economies are growing, unemployment is falling across Europe and public deficits are below 3%.

Since 2013, 9.2 million jobs have been added, although in some countries and sectors, employers still find it difficult to hire workers.

European Central Bank chief Mario Draghi told EU leaders on Thursday (18 October) that, when it comes to the labour market, the end of the cycle is nearing, given the difficulties in some member states to find workers.

The positive side effect is that the scarcity of skilled workers is pushing up salaries. Annual growth in negotiated wages in the eurozone increased from 1.5% in 2017 to 2.2% in the last quarter.

The Brief, powered by AmCham EU – Sweating a way out of the pit

Ten years after the Great Recession, the social scars of the crisis are slowly starting to heal. But the youngest generation is entering the labour market in troubling conditions while Europe remains unprepared for the future of work.

 

But the loss of economic steam is coming in parallel with piling external risks and a large number of potential triggers of the next recession. For analysts, China’s high debt level is a worrying factor.

In Europe, meanwhile, the bitter clash between Italy and its EU partners over Rome’s budget for next year could also bring a repeat of the market turmoil seen in 2011 and 2012.

Italy’s 'unprecedented' breach of fiscal rules clouds euro summit

Euro-area leaders agreed on Thursday (18 October) to accelerate the work to bolster the monetary union as the European Commission questioned half a dozen member states’ efforts to balance their public accounts, particularly Italy.

But investors and experts agree that crises always come from unexpected flanks, the “unknown unknowns” as Donald Rumsfeld once said.

Extreme parties and populist forces have been on the rise across Europe in recent years despite the robust economic figures. Their numbers could only improve once the consequences of the slowdown start to kick in.

In the last Eurobarometer, published last week, the number of citizens who consider that things are moving in the wrong direction in Europe started to increase again after two years of decline. Today, half of Europeans are unhappy with the direction Europe is heading.

In recent years, economic dissatisfaction has proved to be a powerful force to shake up the political landscape in Europe and elsewhere, from the ‘Indignados’ movement in Spain to Occupy Wall Street or the Arab Spring.

Extreme parties are starting to turn back again to the economic agenda to throw their punches.

The leader of far-right Lega in Italy, Matteo Salvini, attacked Brussels’ “politics of austerity” when he launched a new political platform together with French nationalist Marine Le Pen.

Their punches will only hit harder if the numbers start to turn red again.

The Brief – Enemies of Europe

Economic matters matter again, as the Italian government wants to showcase its battle against the European Commission over its spending plan as a renewed European crusade against austerity. But who are the real enemies of Europe?

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