25 Years IWH

Europe in crisis

Economic, refugee and confidence crises. The EU is currently having to fight on many fronts at the same time.

Dossier

 

 

In short

It was back in 2007 that the US property bubble burst, sparking the global economic crisis. The collapse of the Lehman Brothers investment bank in 2008 marked the first low-point of the financial crisis. For the European Union, however, the danger was by no means over: the billions of euros of tax revenue that had to be used to protect banks from insolvency soon plunged European countries into a debt crisis, and shortly thereafter into the Euro crisis. Greece in particular faced a huge loss of confidence on the international financial markets - from which Germany gained significant benefit, by the way.

Our expert

 

European decision-makers were confronted with huge challenges, most notably the European Central Bank (ECB). In order to revive the economy, it has been pursuing a much-criticised excessively low interest rate policy for years, even though this is expected to benefit German households. Since 2015, the ECB has been buying bonds from European institutions and States - an extremely well-founded measure. Since June 2016, it has also been buying corporate bonds and published the results of its second stress test round in July 2016.

"ECB is one of the few institutions contributing to the solution."

It is clear that the ECB is implementing specific measures to provide new impetus and increased security to the European economy. “It is one of the few institutions contributing to the solution,” according to Reint E. Gropp, President of the IWH. “But a sustainable solution requires far more decisive political action”. Because new calculations by the IWH also show that the reserves of the European banks are increasing at the ECB - a highly unusual situation.

The refugee crisis is the EU's second major front. A lack of cooperation between Member States has allowed the humanitarian crisis to spread and intensify. And the agreement with Turkey also appears to be precarious. Leading European politicians must now quickly find solutions to the many challenges that have arisen as a result of refugee migration: humanitarian aid, distribution and immigrants' integration into the employment market. And science must also provide analyses and potential solutions. The Leibniz Research Alliance, “Crisis in a Globalised World”, has also investigated the refugee crisis, for example.

On a third front, the EU is battling the dwindling confidence of its citizens. In addition to the growing popularity of Euro-sceptic parties in Member States, the crisis of confidence has further manifested itself in the form of Brexit. A further break-up of the EU can only be prevented, however, if Europe's leading politicians, most notably the new French President, Emmanuel Macron, and Angela Merkel, take a clear stance. The election of Donald Trump in the US has also resulted in further uncertainty for Europe.

Crises are always an opportunity for change. It's no secret that there is improvement potential in many areas of the EU. Perhaps Europe's crises will finally initiate major change processes: improvements in the democratic legitimacy of the EU institutions, less regulation in employment and product markets, a reduction in bureaucracy in both the EU and its Member States, the broad implementation of the capital market union and a new emphasis on EU spending. Only then will the EU be sustainable, prepared for future financial crises, with or without Great Britain, and strengthened by a new cohesion.

Current IWH Publications

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The European Refugee Crisis and the Natural Rate of Output

Katja Heinisch Klaus Wohlrabe

in: IWH Discussion Papers , No. 30, 2016

Abstract

The European Commission follows a harmonized approach for calculating structural (potential) output for EU member states that takes into account labor as an important ingredient. This paper shows how the recent huge migrants inflow to Europe affects trend output. Due to the fact that the immigrants immediately increase the working population but effectively do not enter the labor market, we illustrate that the potential output is potentially upward biased without any corrections. Taking Germany as an example, we find that the average medium-term potential growth rate is lower if the migration flow is modeled adequately compared to results based on the unadjusted European Commission procedure.

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EFN Report Autumn 2016: Economic Outlook for the Euro Area in 2017 and 2017

European Forecasting Network

in: European Forecasting Network Reports , No. 3, 2016

Abstract

During the first half of 2016, investment activity of private firms was weak in most advanced economies and labour producitivity was even decreasing, as was world trade in goods. Consumption of private households, however, kept the world economy afloat. Within this global context, the modest recovery of the euro area economy continues, with important tailwinds from labour markets. Employment ist expanding everywhre, even in those countries, such as France and Italy, where unemployment rates have still not come down significantly. Since monetary and fisical policies will not become more expansive in 2017, the stimulus from cheap oil is fading, and exports to the UK will be dragged down by the fallout of the Brexit votem there is reason to expect the euro area recovery to lose some momentum. GDP will, according to our forecast, increase by 1,6% in this year and by 1,5% in 2017, about as much as potential output in the euro area. Our inflation forecast for 2016 is 0,2%. For 2017, we expect inflation to increase up to 1,2%, as during next year the favourable effects of decreasing energy prices will fade off.

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Kommentar: Großbritanniens Nein zur EU wird für beide Seiten teuer

Reint E. Gropp

in: Wirtschaft im Wandel , No. 3, 2016

Abstract

Die Briten haben sich überraschend klar gegen einen Verbleib ihres Landes in der Europäischen Union entschieden. Das Ausscheiden Großbritanniens aus der EU hat nicht nur politisch, sondern auch ökonomisch tiefgreifende Konsequenzen für das Land selbst, aber auch für das übrige Europa. Entscheidend ist jetzt die Reaktion der verbleibenden Länder auf das Votum, insbesondere die Frankreichs und Deutschlands.

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EFN Report Summer 2016: Economic Outlook for the Euro Area in 2016 and 2017

European Forecasting Network

in: European Forecasting Network Reports , No. 3, 2016

Abstract

Short run consequences of Brexit for the euro area economy mainly depend on the effects on confidence in the stability of the European Union and the currency area in particular. Anti-European (or indeed anti-globalization) movements are certainly encouraged by the British vote. More important, however, might be a reverse effect: from the perspective of the British turmoil, the euro area might in the near future appear as a zone of relative stability and calm. Against the background of a sluggish world economy, the euro area economy recently performed reasonably well: dynamics have been slowly increasing since 2013, and the rate of expansion in the first quarter of 2016 was one of the highest of the past couple of years. Looking forward, the drivers of the recovery should continue supporting growth in the second half of 2016 and for much of 2017. Our forecast is that euro area GDP will expand by 1.7% in 2016 and by 1.6% in 2017, with only a minor effect from Brexit. This year, like in 2015, average oil prices will probably be markedly lower than they were a year ago, supporting real incomes of private households and lowering production costs of firms, and monetary policy will still be supportive. Labour markets appear to continue improving slowly. Associated with the improved economic conditions, we expect a slight increase in euro area inflation during 2016, 0.3%, with a more marked increase in 2017, 1,3%.

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FDI, Human Capital and Income Convergence — Evidence for European Regions

Dominik Völlmecke Björn Jindra Philipp Marek

in: Economic Systems , No. 2, 2016

Abstract

This study examines income convergence in regional GDP per capita for a sample of 269 regions within the European Union (EU) between 2003 and 2010. We use an endogenous broad capital model based on foreign direct investment (FDI) induced agglomeration economies and human capital. By applying a Markov chain approach to a new dataset that exploits micro-aggregated sub-national FDI statistics, the analysis provides insights into regional income growth dynamics within the EU. Our results indicate a weak process of overall income convergence across EU regions. This does not apply to the dynamics within Central and East European countries (CEECs), where we find indications of a poverty trap. In contrast to FDI, regional human capital seems to be associated with higher income levels. However, we identify a positive interaction of FDI and human capital in their relation with income growth dynamics.

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