Earlier this week the European Commission published its spring forecast, which seeks to evaluate the economic prospects for the whole of the EU, for the eurozone and for each individual member state. With regard to growth in the eurozone, the Commission is estimating that there will be a growth rate of 1.6 per cent, down from the estimate of 1.7 per cent published in February of this year.
The Commission is also estimating that the growth rate for 2016 for the whole of the EU shall be 0.1 per cent less than it had originally estimated, at 1.8 per cent. The rate in 2017 is estimated to be 1.7 per cent for the eurozone and 1.8 per cent for the whole of the EU.
That is the headline figure, which makes the news. However, there is more to it than just that and it is worth considering some points. The main reason for reducing the estimated growth rate is that investment has remained at modest levels and unemployment has remained at very high levels.
Dogmatic approaches, as we have seen being adopted in recent months by some governments, are certainly not required
These two factors have contributed to a downscaling in the potential for growth. What is also not helping is the exposure to debt by the banking sector, which serves as hindrance to the extension of credit facilities to the real economy.
With regard to Malta, the European Commission is expecting the growth rate to decelerate from 6.3 per cent in 2015 to 4.1 per cent in 2016. In spite of such a deceleration, the growth rate is still very healthy. The growth in GDP is expected to be supported by public sector investment. Moreover the fiscal deficit is expected to go down further – so good news overall.
The only snag is the inflation rate. This is likely to pick up and may be over the two per cent threshold in 2017. This is in contrast with the rest of the eurozone, where inflation is likely to remain below the target set by the European Central Bank.
Turning to the inflation rate in the eurozone a deeper analysis needs to be undertaken, as no matter what measures the ECB is taking to increase liquidity through its quantitative easing programme, which should then stimulate consumption, the results are not up to expectations. Low inflation, low investment and low GDP growth rates and possibly high unemployment are likely to become an endemic feature of the eurozone economy.
We need to start from what is generally considered a positive aspect of the eurozone economy – the positive balance in the current account of international transactions, between the eurozone countries and the rest of the world.
A positive balance means that there is a net injection of income into the economy – which is very fine. In fact it helped countries like Spain and Italy to mitigate the impact of the recession and countries like Germany to grow at a significant rate.
However, over the last years that positive balance has been increasing significantly from €34 billion in 2009 to an estimated circa €400 billion in 2016. What is likely to be happening is that businesses based in the eurozone are facing low internal demand and so have sought to export their production in bigger proportions.
As a result of this positive balance on the current account, the value of the euro against the dollar has gone up, and thus imports are cheaper. In spite of these cheaper imports, personal consumption and investment have still remained sluggish, with the result that the inflation rate remained low.
Moreover, as the value of the euro increased, exports have become more expensive. So there should not have been this positive increase in the current account balance. The only way this was sustained and improved so dramatically is through lower costs, notably wages and salaries. With incomes flat and with an ageing population (and therefore a lower propensity to consume) in most eurozone countries, it comes as no surprise that the inflation rate has remained so low, and is likely to remain so.
Thus it is hoped that the spring forecast of the European Commission should really serve to create a better understanding of what needs to be done to move out of what is being seen as an impasse. I believe that we require a fresh approach to the situation. This calls for innovative solutions at an EU level and statesmanship qualities by political leaders.
Dogmatic approaches, as we have seen being adopted in recent months by some governments, are certainly not required.