How to combat Europe’s economic slowdown by Christian Odendahl
Europe is experiencing an economic slowdown at an exceptionally bad time, but has the tools to fight it and should use them soon. After two years of decent growth, all the indicators suggest that the European economy is cooling, though not yet heading towards a recession. The OECD’s composite leading indicator for Europe, which compiles economic data predicting GDP growth, is at its lowest level since the depths of the euro crisis in 2012. The purchasing managers’ index, which measures business activity and conditions, has fallen in both the eurozone and the world economy for most of 2018. Now the International Monetary Fund has revised its economic forecast down for eurozone and global growth. To a large extent, China and the US are driving the slowdown in the world economy. The Chinese government is gradually moving China’s growth model away from exports and credit-fuelled investment towards domestic consumption. This difficult process is bound to reduce growth, which had been remarkably high for a middle-income country. It will reduce Chinese demand for imports. The Trump administration has cut taxes, as promised to voters and the Republican party – a fiscal stimulus that the US economy did not need. The Federal Reserve has therefore continued to raise interest rates, dampening the effect of the
stimulus on the US economy and increasing the dollar’s value. US demand for foreign goods and services, and the trade deficit, have consequently increased. Trump thus provided an economic stimulus to the world which has now largely run its course. For the world, the slowdown is a return to normal. For Europe, that is bad news. Over the last five years, the eurozone has grown 1.9 per cent per year on average. The expansion was mostly driven by stronger domestic demand, fuelled by the collapse in oil prices, which boosted consumers’ real incomes, and by less restrictive fiscal policy and more aggressive monetary easing by the European Central Bank (ECB). But in the five years before that, the eurozone followed Germany’s export-led growth model: between 2008 and 2013, the only meaningful source of European growth was net exports, growing 0.5 per cent a year on average. As a result, the eurozone’s current account surplus grew to more than 4 per cent of GDP – and remained there despite the recent period of strong domestic growth. A slowdown in the world economy, especially in such important trading partners as the US and China, will therefore hit Europe disproportionately hard.