This week the European Union published the economic autumn forecasts. The report covers each individual member state as well as the eurozone and the Union as a whole. The outlook for the immediate future is a pessimistic one, compared to the optimism displayed at the end of 2013, when most countries had registered economic growth. At that time it was thought that the recovery would be more broadly based and a sustained one.
However, as 2014 progressed, the larger EU economies started showing signs of faltering. GDP growth did not maintain the expected momentum. Thus the French economy has stagnated, the Italian economy has shrunk yet again, and the German economy has faltered. The main issue seems to be investment.
Students of economics know that unless investment accelerates, it would be difficult to achieve long-term growth. Personal consumption cannot be the engine of long-term sustainable growth.
Prospects for 2015 and 2016 are that economic activity would strengthen. However, there are some fundamental assumptions being made. The assumptions are that structural reforms start to bear fruit, labour markets improve and banks become more supportive in their approach to businesses.
Personal consumption cannot be the engine of long-term sustainable growth
Starting with the third assumption – more support from banks to the real economy – one needs to note that the European Central Bank has gone very far in adopting an accommodative monetary policy in the eurozone.
This does not seem to have been enough. It will need to resort to quantitative easing, as the UK and the US did. However, even this will fail if the banking regulation becomes more tough.
On the one hand, banks are being told to lend more money, while on the other, regulation is making it more difficult for them to lend more money.
Structural reforms and the labour markets can be assessed together. It is recognised that over the years, the protection of certain sectoral interests has brought about the introduction of rigidities in the economy. The end result has been that employers do not feel confident enough to invest and to create jobs.
The need for structural reforms and improvements in the labour market is to address the root cause of this malaise.
However, the lobbies are feeling threatened again and are mounting pressure on several governments not to introduce these changes.
The Italian Prime Minister, Matteo Renzi, is experiencing some of this pressure as he seeks to reform the Italian constitution and the electoral law to provide more stable governments; as he seeks to remove privileges enjoyed by certain segments of society at the expense of the rest of the population; and as he seeks to reform the labour law in a manner that it removes any disincentive to recruit employees on an indefinite basis.
There is really no guarantee that the structural reforms and the improvements in the labour markets that governments know they need to introduce to achieve economic growth, will in fact be introduced.
There is also no guarantee that banks will be more supportive of the real economy. Thus the assumptions being made for 2015 and 2016 may yet prove to be without basis.
A look at the actual numbers says it all. The UK economy is expected to grow by 3.1 per cent this year.
The growth rate in Germany is 1.3 per cent and the average for the euro area is 0.8 per cent.
Two reasons why the economy of the UK has performed better are that the Bank of England was more decisive in its monetary policy and that the UK is not afraid to introduce reforms that help economic growth.
The international situation beyond the EU has not helped during 2014. Global GDP growth for 2014 is lower than expected.
However, the situation is expected to improve in 2015 and 2016. Within such an improved context, the new European Commission and the individual member states must seize the opportunity to get economic growth within the Union back on track.
They must make sure that while the outlook for the short term is bleak, the forecast for the medium term becomes positive.