EconomistIt is hard to avoid the soft bigotry of low expectations. The EU’s statistics bureau titled a recent release—showing no economic growth in the last quarter of 2024—“GDP stable in the euro area”. “Stagnant” would have been more accurate.
Policymakers, at least, are increasingly alarmed by the situation. Ursula von der Leyen and Christine Lagarde, head of the European Commission and European Central Bank respectively, together wrote recently that faster growth was needed to protect the quality of life of Europeans, and their security. The intent was to jolt politicians and the public into action.
But where is growth supposed to come from? Europe’s ageing population is not as innovative as it once was, dampening productivity. The global economy will no longer support Europe’s export-led approach. Investment requires confidence in the future. Consumers are fearful, with many choosing to keep money in the bank. The ECB remains busy fighting inflation and governments are avoiding difficult reforms for fear of a populist backlash. Small wonder, then, that even optimistic growth forecasts for this year barely go beyond 1%.
Chart: The Economist
One idea is that, as inflation subsides, the ECB can return to stimulating the economy with lower interest rates. ECB policymakers have already cut their main rate from 4% in June to 2.75%. Markets expect them to reach 2% by the year’s end, as wage growth cools, which would, in turn, cut cost pressures for firms. Yet the problem is that prices are still rising by 2.5% a year. Those for services are particularly hot, increasing at 4% a year. Thus hope of much looser policy will probably prove forlorn.
Analysts had thought consumers might spur the economy once their real wages started to rise. Now that pay packets are swelling, however, they are refusing to play their part. The euro-zone household savings rate tended to hover at around 12% before the covid-19 pandemic. As of October, the date of the most recent data release, it was above 15%. Consumer sentiment has recently dropped again, to below its long-term average. Europe’s gloom, it turns out, is resistant even to higher wages.
External demand is unlikely to come to the rescue either. China is hellbent on exporting its manufacturing surplus to the world, rather than buying more from Europe. America no longer wants to play the role of consumer of last resort, and could push more Chinese goods Europe’s way by raising trade barriers. Although in theory trade deals could fuel the EU’s export machine, protectionists, led by France, will attempt to slow things down, as can be witnessed in their opposition to a deal with Mercosur, a large South American trade group.