Updated: Feb 7
There are three big economic questions for the EU, particularly the Eurozone, economy.
The first is how quickly inflation will fall and whether it will be sustainable. Eurozone inflation has dropped sharply: the headline rate fell to 2.2% in August 2024. But underlying inflation measures are higher and wage growth is still quite sticky (at around 4% year-on-year). The danger of cutting interest rates too soon have been well flagged, notably by the IMF. Another ECB rate cut (following the 25 basis point cut in June) at the ECB's September meeting now looks quite likely but further reductions depend on how sticky core inflation proves to be. .
The second is management of individual countries' fiscal positions. After suspension during Covid, the rules on Eurozone fiscal debts and deficits (60% and 3% of GDP, respectively) have been reinstated, albeit whilst allowing a more gradual adjustment for transgressions. Five of the twenty members of the eurozone – including France and Italy, the second and third largest members, are judged by the European Commission to have excessive fiscal deficits and need to take corrective action. Realistically, it will take many years to correct these positions. Meanwhile, Germany is clearly reverting to type on fiscal rectitude, seeing itself as setting the standard for the rest of the bloc and aiming to bring its debt level back to 60% (it is slightly above currently). Christian Lindner, German Finance Minister commented at the IMF meetings in Marrakech on 12 October 2023 , that “I’d rather do the right thing and lose my job than do the wrong thing and get re-elected”.
The third longer-term question is whether growth across Europe can improve. Since the euro was launched in 1999, eurozone GDP growth has averaged 1.3% p.a. compared to 2.2% p.a. in the US.
How might Europe’s relative malaise be overcome? Kristalina Georgieva, the IMF’s managing director, has suggested four ways (in an FT interview on 2 May 2024 and at the IMF Spring Meetings in Washington DC in April 2024).
First, the EU should stop being so self-critical and regain self confidence. Easier said than done.
Second, improve the functioning of the European single market. “The capital markets union is absolutely essential for European competitiveness, because in the absence of it, the financial assets of Europe do not work hard enough,” Georgieva has said. “If you compare the US and Europe in terms of size of financial assets, they’re pretty much the same . . . But in the US, the functioning of the capital markets is what makes a huge difference in how these financial assets deliver for the economy.”
Third, migration could provide a solution to Europe’s ageing population. In the US, the inflow of migrants has made a huge difference to economic growth, in Europe much less so.
Finally, it is easier for innovation to turn into business development and then to be scaled up in the US than in Europe. That should improve.
All four sound perfectly sensible. Progress? More tricky.