The Strategist

European economy is on the rise in spite of political turmoils

01/09/2018 - 14:01

The European economy is entering 2018 on a big rise. Now the situation in the EU economy is better than ever.

Descrier via flickr
Descrier via flickr
Harald Magnus Andreassen, chief economist at Sparebank1 Markets, says: "Until a few years ago, many believed that Europe was cursed. It was alleged that there was something structurally incorrect in the economy, something that prevents growth. Now we see that this analysis was erroneous. Growth is decent, unemployment is rapidly declining. And Europe has not disintegrated."

Growth across the continent

In the last year, the economy of all EU and EFTA countries has grown by 1% or more. For the first time since the first quarter of 2007, all 31 of these economies demonstrate such steady growth, as evidenced by the figures quoted by Eurostat.

In Germany, optimism in the economy reached the highest levels in the autumn of 2017 since the fall of the wall. IFO, the agency analyzing the mood among German enterprises, had difficulties with finding new words of praise in their monthly reports.

In June last year, the mood was described as "euphoria," but since then optimism has continued to grow.

"The German economy celebrates as if it had the last day every day," said Carsten Brzeski, senior economist at ING Bank, in November.

He cites the fact that even instability in German politics has not destroyed optimism in the country.

"The current situation in Germany is a perfect illustration of the phenomenon that was characteristic of the entire euro area throughout the year. Rising confidence and strong growth go hand in hand with political uncertainty and instability, "says Brzeski.

Germany’s neighbor, France, also experienced a significant upswing in 2017.

In general, activity in industry in the euro area is the highest since the beginning of its measurement in 1997. This was confirmed by the monthly PMI index for December.

Lack of labor

Strong growth led to the fact that the European Central Bank was forced to change its growth forecast in the euro area. Now it looks like 2017 will be the best since the beginning of the financial crisis. The GDP growth was 2.4%, and this is faster than in the US and the UK, according to the OECD.

The unemployment rate, which has been a big headache in the euro area since the beginning of the financial crisis, is steadily declining. In the worst year of 2013, it was more than 12%. Now unemployment is at the level of 8.8%.

However, the differences between the countries are great. In Spain, unemployment is still over 15%, and reaches more than 20% in Greece. At the same time, the unemployment rate in Germany is 3.6%, and this is the lowest level since the unification of the east and west of the country.

"One of the biggest problems in Germany is the shortage of labor. The country has a record number of open job positions", says Andreassen.

Fear of a bubble in Romania

The Eastern EU countries are also having a good time. Some countries, however, are warning of galloping price increases and financial bubbles.

The most rapid growth was noted in Romania, where the economy grew by 8.6% in one year.

"Romania is not China. It is clear that such growth is not sustainable," said Ionut Dumitru, who heads the Fiscal Council of Romania, an expert council overseeing the state of the country's economy.

In the Czech Republic, a strong increase in wages and house prices led to the fact that the Central Bank doubled the interest on deposits twice during 2017. Unemployment in the country is at a record low of 2.7%.

However, Andreassen does not see any threat that the bubbles in some countries may affect the European economy in the years to come.

"Unlike the US and the UK, where the unemployment rate is very low, Europe still has work to do. But it seems that good growth rates will continue in the future".

Elections and low growth in Italy

Andreassen believes that there are several factors contributing to the fact that the Eurozone catching up after the financial crisis is slower than the US and Britain.

"First, the US did not have Greece. Secondly, Europe later began to clean up the financial sector and to demand that banks create capital. It took time to create a banking union in the euro area, but gradually it was possible to accomplish a lot in this area. Important steps have been taken forward," he said.

Andreassen emphasizes that the European economy still has problems, and notes that Italy is particularly negative. In March, the country will be having parliamentary elections, and this can lead to increased instability.

Nevertheless, the chief economist believes that the euro is stable.

"When we discuss the problems and shortcomings of the euro, it's easy to forget that the old system with local currencies also had significant problems associated with inflation and instability. Few want to return to lyres, pesetas and francs," says Andreassen.

74% of the inhabitants of the Eurozone are positive to the euro, according to the latest data from the Eurobarometer, which is conducted every six months. This is the highest figure since 2004.