Darker Clouds over Europe

By Dan Steinbock

Not only is Europe’s expansionary cycle fading, but the region is about to face challenges that it has to tackle amid growing political fragmentation.

Italy slipped into recession in the fourth quarter of 2018, according to new data. France continues to be haunted by Yellow vests protests. Germany has entered an era of uncertainty. And Brexit overshadows the UK future.

In the absence of Trump’s tariffs, Europe could have benefited from a nascent recovery of world trade, investment and finance. But now even these hopes are diminishing.

 

End of expansionary cycle, rise of political fragmentation

Historically, four economies – Germany, France, Italy, and the UK – have accounted for much of the region’s growth. Yet, the expansionary cycle has eclipsed in each.

Through the crisis years, the steady leadership of Chancellor Angela Merkel’s Germany supported European integration and migration. However, the Trump administration’s tariff policies cost Merkel nightmares at home and abroad. The uneasy coalition between her center-right CDU and the center-left SPD has been strained, while the left-leaning Greens and radical right AfD have gained. As a result, the ruling coalition suffered an electoral defeat of the ruling coalition in regional polls. In 2018, German economy grew by 1.5% and continues to slow.

After his 2016 election win, President Emmanuel Macron was seen as Europe’s new savior, though mainly in the U.S. Yet, as a business-friendly economy minister in Hollande’s government, he had alienated most socialists while failing to win over most conservatives. His movement En Marche! served as a façade for French corporate giants in banking, real estate and finance, which he was quick to reward after the election. As Macron’s tax reforms fell disproportionately on the working and middle classes, the Yellow vests movement spread like a wildfire. In the fourth quarter of 2018, French growth slowed to 0.9%, despite Macron’s €10 billion stimulus package to appease the Yellow Vest protests.

In the early 2010s, UK was among the fastest growing EU economies; today, it is among the slowest. In the three months to last November, it grew only by 0.3%. Almost three years since the Brexit vote, there is little consensus on the terms of the UK-EU divorce, despite the looming March deadline. Thereafter, UK is likely to face higher tariff and non-tariff trade barriers, reduced foreign investment and lower migration inflows. Relative to a no-Brexit scenario, the divorce threatens to penalize UK GDP by 5 to 8%.

 
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About the Author

Dr. Dan Steinbock is the founder of Difference Group and has served at the India, China and America Institute (US), Shanghai Institute for International Studies (China) and the EU Center (Singapore). For more, see http://www.differencegroup.net/