The new Europe
The financial crisis is largely over, yet confidence in the ECB and EU remains low. Thanks to Brexit and populism, there is currently no shortage of challenges – nor of a visionary upswing in some parts of Europe.
In a nutshell
Billions in taxpayers' money has been spent rescuing banks since the financial crisis erupted in 2008. From the debt crisis to the euro crisis, the EU stumbled from one low point to the next. Greece in particular had to contend with a loss of confidence on the international financial markets – from which Germany gained considerable benefit, by the way. The refugee crisis followed in 2015, with the Brexit referendum in the UK and the election of Donald Trump in 2016. But new visionaries also took to the international stage, including the new French President, Emmanuel Macron.
In order to reboost the economy, the European Central Bank (ECB) has been pursuing a much criticised excessively low interest rate policy for years, which we can assume is benefitting German households, however. Since 2015, the ECB has been buying bonds from European institutions and states – a measure for which there are justifiable grounds. Since June 2016, it has also been buying corporate bonds, and published the results of the second stress test round in July 2016.
"ECB is one of the few institutions contributing to the solution."
It turns out that the ECB is taking specific action to continue providing momentum and 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 to achieve a sustainable solution, politicians need to act much more decisively." However, countries are different as to how quickly they implement reforms and hand oversight over to EU-institutions.
The refugee crisis was and still is one of the EU's main stumbling blocks. A lack of cooperation between member states has allowed the humanitarian crisis to continue to spread, with immigration and the distribution of refugees remaining a critical issue, despite the EU-Turkey Agreement. Immigrants' integration into the labour market, especially in Germany, will remain a political challenge for decades. But science must also provide analyses and potential solutions. For example, the Leibniz Association's "Crises of a globalised world" research network has addressed the issue of the refugee crisis.
Migration was and is a constant issue when it comes to Brexit. But the UK's decision to leave the EU also touched on other economic dimensions: Even before the referendum, an IWH study had already suggested that the pound would react strongly to the UK's departure. With the increasing likelihood of Brexit, more than 50% of researchers asked by Thomas Krause predicted a significant devaluation of the pound against other currencies, including the euro. Stock market price volatility therefore reached record levels ahead of the referendum. "This turbulence reflected the uncertainty that was and is associated with the Brexit decision", states Gropp. The President takes a calm view the fate of London's financial centre, however: "London's financial centre will retain its dominant position within Europe despite Brexit. This is based on both the experience gained from the introduction of the euro and is also due to London's considerable location factors: the size of the city, the regulatory environment and its human assets." Should the United Kingdom withdraw from the EU in a „hard Brexit“ in March 2019, exports to Great Britain are likely to decline. Export-oriented EU countries such as France and Germany, as well as important suppliers like China would suffer job losses. In Germany, the car industry would be most affected.
On a third front, the EU is fighting for the confidence of its citizens. But while on the one hand, the popularity levels of eurosceptic parties rose or national conservative parties even governed some Member States in the past, the EU also appears to be reinventing itself: Neither Brexit nor the election of Donald Trump in the US have fractured the EU. On the contrary. Despite meeting with domestic resistance, French president Emmanuel Macron is a committed European. The EU also now aims to close ranks when it comes to defense.
Crises are always an opportunity for change. It is no secret that the EU has potential for improvement in many respects. Perhaps this new momentum will finally trigger other important change processes: improvements to the democratic legitimacy of the EU institutions, less regulation of the labour and product markets, a reduction in bureaucracy both in the EU and its member states, the implementation of the capital markets union and a new weighting for EU spending. This is the only way for the EU to remain sustainable – prepared for future financial crises and strengthened by new cohesion.
Publications on "The New Europe"
EFN Report Winter 2018/19: Economic Outlook for the Euro Area in 2019 and 2020
in: EFN Reports, No. 1, 2019
• The cyclical upswing of the world economy comes to an end, since expansionary policies in the US are expected to peter out in 2019, and the protectionist course of the US government clouds the perspectives for world trade. • However, if a major trade conflict can be avoided, chances are good that world production growth will be close to the long-run average of a bit more than 3%, with trade expanding at a similar pace. • Slowing exports, in particular to China, can partly explain the setback, while domestic conditions still appear favourable: firms continued hiring, albeit by less than before, tight labour markets in many member countries have caused wages to rise more quickly, and house prices continue to increase markedly. • Since a trend to higher inflationary dynamics is still not detectable, the ECB is likely to either keep key interest rates unchanged in 2019 or raise them very carefully at the end of the year. • All in all, we expect the euro area growth rate to come down from 1.9% in 2018 to 1.5% in 2019 and 1.8% in 2020, and inflation to slightly slow down from 1.8% in 2018 to 1.6% in 2019 and 1.5% in 2020.
EFN Report Autumn 2018: Economic Outlook for the Euro Area in 2018 and 2019
in: EFN Reports, No. 3, 2018
• Signs of a slowing world economy are piling up: Since the beginning of the year purchasing manager indices have been declining globally, in summer higher US interest rates led investors to withdraw capital from emerging markets, and as a consequence, capital costs rose and currencies depreciated in many emerging markets economies. In October stock prices decreased markedly worldwide including the US, despite the strong upswing in this country. • As a consequence of the turmoil on financial markets, monetary conditions in many emerging economies are no longer favorable. What ultimately counts for the prospects of the global economy, is, however, the performance of the US, the Euro area, China and Japan. The upswing in the US appears stable enough to continue well into 2019. While at present the rest of the group appears to lose momentum, there is a good chance that production in each of these economies will still expand at rates that are close to their potential growth. Further protectionist rounds are the most important risk to this scenario. • In the first half of the current year the euro area economy expanded at a markedly slower rate than in 2017, about 0.4% per quarter, but still substantial. Rising risk premia on Italian assets will probably force banks in this large country to tighten credit conditions, and a slowing world trade will dent export growth. All in all, we expect GDP growth in the euro area to go down from 2.4% in 2017 to 2.0% in 2018 and to 1.7% in 2019. • Employment continues to expand and vacancy rates are at present higher than in 2017. As a consequence, wages rise more quickly: nominal compensations per employee started accelerating early in 2017, and negotiated wages followed at the beginning of 2018. Wage inflation of slightly below 2.5% and healthy growth in employment raise real labor incomes markedly. • Our forecasts are based on the assumption that rating agencies will continue as-signing investment grade to the Italian government debt, and that the Italian government and the European Commission will find a compromise about the draft budget of the country in the coming weeks. Another assumption is that the UK will not exit the EU in an unorderly way in March 2019.
EFN Report Summer 2018: Economic Outlook for the Euro Area in 2018 and 2019
in: EFN Reports, No. 3, 2018
• In summer 2018 the cyclical upswing of the world economy is not over, but it appears to be fragmenting. While economic activity in the European Union has lost steam, the upswing in the US has gained pace, and growth in China appears to be robust. • Markets for commodities as well as for capital are at present strongly affected by political movements: oil prices are more than 50% higher than one year ago, as the US exit from the Iran nuclear deal puts the long run oil supply from Iran at risk, and the strongly expansionary US tax reform explains the rise in US long run interest rates. . • Uncertainties about the future international trade system cause firms to slow down or even reverse the globalization of value chains. As an early consequence, world trade in the second half of 2018 and in 2019 will expand at much slower rates than during 2017. • In the euro area growth slowed in the first quarter 2018, due to weaker investment activity in France and Italy and, more importantly, a fall in exports in all larger euro area economies except Spain. However, the drivers of the upswing such as low interest rates for credit and expanding real incomes will still be supportive in the near future, and fiscal policies will be slighly more expansionary. But a slowdown in world trade will dent export growth as well as corporate profits. All in all, we expect GDP growth in the euro area to go down from 2.4% in 2017 to 2.1% in 2018 and to 1.7% in 2019 – a forecast that will only be realized if damages to the international trade system are limited and if the European sovereign debt crisis does not come back. • While wage inflation has been slowly increasing during the past quarters to about 2%, a clear upwards trend of core consumer price inflation is still not detectable. The recent jump of the headline rate to 1.9% is due to higher oil prices. Our forecasts for 2018 and 2019 are close, although still below, 2%.
Kommentar: Deutsche Blockade der EU-Reformen eine Gefahr für Europa
in: Wirtschaft im Wandel, No. 2, 2018
In den letzten Wochen haben wir zwei wichtige Dinge gelernt. Erstens: Europa hat keinen verlässlichen Partner in den USA und ist auf sich gestellt. Zweitens: Der wirtschaftliche Boom im Euroraum wird nicht unendlich anhalten. Auf den ersten Blick haben die beiden Erkenntnisse nicht viel miteinander zu tun, auf den zweiten jedoch machen sie klar, dass Deutschland seine Blockadehaltung in Bezug auf Reformen in der Europäischen Union (EU) aufgeben muss, um eine neuerliche Krise zu vermeiden.
Aktuelle Trends: Zollpolitik der EU und der USA im Vergleich
in: Wirtschaft im Wandel, No. 2, 2018
Die EU-Zollpolitik zeigt sich protektionistischer als die Zollpolitik der USA. Der durchschnittliche EU-Zollsatz auf Importe liegt deutlich über dem durchschnittlichen Zollsatz, den die USA auf Importe erheben. Dennoch können in beiden Wirtschaftsräumen viele Produkte zollfrei eingeführt werden.