Three trends that will continue hurting the eurozone in 2017

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

2016 did not fall short on anxiety over the eurozone’s fragile economic recovery. From feeble growth to fierce backlash, to full-blown uncertainty, here are three trends that look all but certain to spill over into 2017, writes Ilaria Maselli.

Ilaria Maselli is a senior economist for Europe at The Conference Board, a global, independent business membership and research association.

#1: Political uncertainty on steroids

In a referendum earlier this month, Italian voters dealt a knockout blow to their prime minister’s proposed reform agenda. He declared his resignation that very night.

Disdain for the current crop of politicians extends throughout Europe, with uncertainty surrounding the 2017 elections in the Netherland (March), France (May), and Germany (September).

On top of all of this comes the start of the Brexit negotiation, presumably in March. How will Theresa May manage to ensure that companies but not people retain the freedom of movement? For the rest of the EU, more than an economic challenge, the negotiation poses an existential challenge: does the eurozone need more or less integration to fix its economy and address the uncertainty? And if the answer is “more” what are the policies needed? Eurobonds? A common unemployment insurance scheme? More redistribution across regions?

This lack of confidence almost always puts the brakes on economic growth, since it pushes companies to postpone hiring and delay investment decisions. Moreover, recent research reveals that the most productive companies – those that have the most to lose from taking risks – demonstrate the strongest wait-and-see attitude. A protracted state of uncertainty can therefore permanently affect the productivity, innovation and growth performance of even the best companies.

#2: Backlash against trade

Backlash against trade and globalization characterized 2016 and will continue as we head into 2017. Voters across both sides of the Atlantic are expressing their discontent for new trade deals. Look at President-Elect Trump’s pledge to withdraw from the Trans-Pacific Partnership in his first 100 days.

While economists agree that freer trade pushes companies to become more efficient and offers consumers better choices, we are starting only now to understand the distributional consequences of these transformations, especially on workers in advanced economies. The impact of China’s raise on income distribution has been especially large, especially in the United States

In Europe, which is characterised by relatively open economies, the challenge is to reconcile the need to stimulate growth through globalisation with citizens’ fears and discontent after two recessions in eight years. Trade plays an important role in the Euro Area economy characterised by a positive trade balance, with more exports than imports.

At the same time, multinationals and policy-makers cannot ignore the concerns expressed against CETA and TTIP. While CETA has been agreed by governments, adjustments may need to be discussed as 27 European parliaments and the European Parliament will be discussing ratification of the agreement in the coming year.

#3: Continually weak economic growth

The Conference Board projects the eurozone to grow at a dismal 1.4% in 2017, slightly below the 1.7 % growth performance in 2016. Europe faces major constraints to accelerating growth beyond its potential – first and foremost, talent shortages.

The portion of working-age Europeans is shrinking by the day, while unemployment rates are (fortunately) also dropping. But unemployment has now become very low in some countries, such as Germany and The Netherlands. As a result, it takes longer and longer for companies to recruit talent, and they also face more competition in securing the best and brightest. More efforts are needed from talent managers to make sure that the most productive workers are not tempted to find their fortune elsewhere.

Second, most sources of growth remain weak for the eurozone, with the exception of domestic consumption. With no sign of uptick on any other front (investment or export), many are calling on governments to stimulate the economies by stepping up fiscal policies, The European Commission invited countries in a strong financial position (in particular directed at Germany) to open the public purse.

However, unlike with the incoming Trump Administration, a coordinated fiscal stimulus does not look likely to happen in Europe in 2017. The priority of the current German government – the largest eurozone economy and the watchdog of its financial stability – is reducing its debt even further to remain the solid anchor of the eurozone. It is also doing so to avoid being caught by surprise by the changing economy in times of aging.

With the downside risks for economic growth abound, it is difficult to foresee any upside risk at the horizon that could lift the GDP forecast in 2017. At best, Europe will continue to muddle through. At its worst, the downward spiral plaguing Europe may accelerate.

Follow Ilaria Maselli on Twitter: IlariaInBxl

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