Is Europe Sick?

There’s been a kind of pandemic in the press in recent weeks about Europe being “sick.” The trouble is, it’s very hard tofigure out, after reading the articles, exactly what the sickness is.

A recent Bloomberg Opinion column asks “What is ailing the Euro-zone economy?” – as though Europe were moribund, deathly ill. The author then incorrectly cites an IMF blog to justify the claim. The blog actually says: “We have revised downwards our forecasts for advanced economies slightly, mainly due to downward revisions for the euro area.” Sounds more like a head cold to me.

There have also been various articles headlined with “the sick man of Europe – of dubious accuracy.” That country is either Germany, or Italy or France, depending on the author. The Wall Street Journal pops for Germany where there is supposedly a “productivity crisis.” Yet, according to OECD current statistics, Germany is smack in the middle of the developed countries for productivity, ahead of the Netherlands and behind Denmark.

As for Italy, the recent review by Fitch Ratings, which kept a positive credit rating while, however, maintaining a potentially negative outlook, commented: ”There has been steady employment growth of close to 1 per cent, consumer and investor confidence remain at high levels, strong external demand is boosting exports, and there is a partial recovery in investment helped by more supportive credit conditions and the extension of tax incentives.”

That doesn’t sound very sick, either.

So, is Europe sick?

Hardly, but there are some serious problems weighing on the Continental economy this year.

The most serious is that of global trade, as European Central Bank president Mario Draghi pointed out on 27 March 2019 in a speech.
“Yet it was clear that the loss of growth momentum could become more broad-based and persistent if external demand were to remain weak, and this has largely been realised. The weakness in world trade has continued, which has significantly affected the manufacturing sector. Global goods import growth in January reached its lowest level since the Great Recession, on the back of rising uncertainty about trade disputes and a slowdown in emerging market economies, especially China.”

Exports drive growth in Europe, so lack of demand hurts the core European economies most of all. But should we expect poor trade growth in the long-term?

Jan Willem Velthuijsen, chief economist, PwC Netherlands, sees growth slowing slightly through 2020, but forecasts stability (please see the chart above). This would change, should trade relations deteriorate across the globe.

But most economists aren’t predicting such a descent into chaos: JPMorgan Research, for example, says “After a volatile end to 2018, tentative stability has returned to risky markets at the start of the new year, with investors seeing some reversal of the losses experienced in December. Growth momentum has slowed, but the deceleration phase should end before midyear with supportive and flexible policy actions—notably China easing and the Federal Reserve pausing. Recession risks, in the meantime, remain modest for the year ahead.”

Guess what? Brexit!

So guess what the second risk weighing on the European economy is? Brexit!

Yes, a Brexit-related mess (there are several kinds forecast depending on the scenario) will indeed hurt the European economy badly – the UK is one of the most important trading partners for nearly every country in the region.

As no one knows what will happen regarding Brexit, traders and analysts have to take worst-case scenarios into account. The economic consequences are grim across the board for all countries involved.

To give just a basic idea of what’s involved: One third of the UK’s food comes from the EU. After Brexit, high tariffs will be placed on food exports from Europe. This will seriously hurt European business, not just exporters, but every business in the export supply chain, from farmers to truck drivers.

Another basic: Financial services in Europe are focused in London. Some banks have already moved to the Continent ahead of a potential Brexit, but there will be confusion and serious losses for banks, brokerages and the entire financial services industry.

For now, it’s still possible that Brexit will be delayed for a long time or called off. If that happens, you will see a massive flow of investment back into both the UK and Europe, and stock markets will go through the roof.
But Brexit is not a fixed, structural determinant for the European economy. Sooner or later, whatever happens, it will be over, and the economy will recover. There is no reason to call Europe “sick,” because British politics are in some kind of weird muddle.

In fact, there is no reason to call Europe’s economy ‘sick’ at all. That kind of journalism is full of sound and fury, but signifies nothing!