April 2019 Key Indicator – the state of the EU economy

Car manufacture mainstay of EU economyLeaving aside its obvious concerns about its future relationship with the UK, the EU economy has more than enough troubles of its own to contend with.

With global growth slowing the EU economy can hardly expect to be immune, but there are some inbuilt issues that are likely to become more pressing and will need to be dealt with as a result.

Europe’s demography is against it with an ageing population and the number of people of working age falling by 0.5% a year despite which the EU unemployment rate has remained stubbornly high at 8% since the 2008 global financial crisis. This is unlike the USA which has a rising workforce, while the UK has a growing immigrant population, with both countries’ unemployment reducing significantly.

The global pecking order in terms of the size of national economies is changing with EU countries falling down the global rankings according to the latest HSBC economic model as highlighted by Hamish McRae in yesterday’s Evening Standard. Germany falls from fourth behind the US, China and Japan, to fifth, France to seventh, Italy to ninth.  HSBC notes that Austria and Norway won’t make it to the top 30 by 2030 and Denmark will drop out of the top 40. The UK, however, is ageing marginally more slowly.

McRae calculates on this basis that the EU falls from about 22% of the world economy to about 17% and without the UK it falls to below 14%.

There are political tensions in several EU countries, as elsewhere, which have given rise to populist movements, such as in Italy and in the ongoing push for Catalonian independence in Spain. With EU Parliamentary elections due in May, this is likely to be a worry.

The ECB (European Central Bank) is regarded as notably conservative and this may, in part, explain why recovery since 2008 has been so slow.

It must also be remembered that the EU is a mix of widely disparate countries, some still using their own currencies, others having adopted the Euro and this, too, creates some tension.

The “powerhouse” countries in the EU have always been Germany, UK and France, with the French and German economies relying heavily on manufacturing and exports, but these have become the source of their current troubles.

Germany narrowly avoided recession in the fourth quarter of 2018 with its largely export-oriented industry suffering, particularly the automobile sector due to a decline in the sale of new cars not least down to tariffs on imports into US and a significant drop in sales to China.  Its banks, too, have been struggling, hence the proposed merger currently under way between its two biggest banks, Deutsche and Commerzbank, a merger aimed at survival based on weakness not strength.

France has fared a little better, but not by much, and it has brought political troubles in the shape of ongoing weekly protests by Les Gilets Jaunes.

Italy’s banks, too, are in dire shape and the Italian economy has been struggling for the past 20-plus years, not helped by its national debt relative to its GDP being second only to Japan’s and its population getting smaller.

After narrowly winning its argument with the EU, which refused at first to accept its latest budget, Italy has recently announced that it will be the first EU country to take part in China’s Belt and Road initiative – an attempt to link Asia, the Middle East, Africa and Europe with a series of ports, railways, bridges and other infrastructure projects. Clearly, Italy has become tired of waiting for the EU to put its monetary house in order, but what are the prospects for its economy?

It has been argued, not least by the Guardian’s Larry Elliott, and by the French leader Emmanuel Macron, that the EU needs closer political and economic integration and that there are design flaws in monetary union that are becoming more obvious and in more urgent need of a fix.

Another issue that, Elliott argues, is making countries in the EU less competitive when pitted against the likes of China is that EU industries are mostly mature, more than 25 years old, and there are no equivalents to Facebook, Google and the like, nor any significant businesses in the emerging technologies of the fourth Industrial Revolution, such as artificial intelligence.

Clearly, there is much to be done to improve the EU economy although it does seem to focus on old industry rather than stimulate business based on new technologies and in Hamish McRae’s view, whatever the current Brexit troubles, it is in the interests of both UK and EU to co-operate.

 

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