The European Commission was in the process up upgrading its 2015 growth forecasts, European Central Bank chief Mario Draghi was dismissing fears of eurozone deflation and Davos organisers assembled a high-profile panel asking: “Is Europe Back?”
“I think the eurozone, overall, is no longer at the centre of all the concerns of the world economy,” Wolfgang Schäuble, the powerful German finance minister, told a keynote Davos panel on the global economic outlook.
Not only is the eurozone back on the front burner as one of the global economy’s most significant risk factors, but also political turmoil is back with a vengeance. Anti-euro populist parties made striking gains in May’s European Parliament elections in France and Spain, as well as in German regional elections. In Greece, the far-left, anti-austerity Syriza party is leading in polls ahead of Sunday’s national elections.
“Europe’s economics are in substantially better shape than at the height of the eurozone crisis but the politics is now much worse,” wrote the Eurasia Group risk consultancy earlier month after naming “the politics of Europe” as its top risk factor to the global economy in 2015.
The European Commission believes the eurozone will grow only 1.1 per cent this year, down from the 1.8 per cent Brussels forecast shortly after Davos last year, and that unemployment will fall to 11.3 per cent, below the 11.9 per cent it reached at the peak of the crisis, but well above historic norms.
More troubling to many economists is the prospect of Japan-style deflation gripping Europe’s common currency. Both the commission and the ECB have been forced to slash inflation expectations for this year. Brussels now believes it will be just 1.1 per cent in 2015, while Frankfurt is projecting 1 per cent. Both forecasts were made before the recent swoon in oil prices.
“Member states are gradually turning the page of the crisis,” Jean-Claude Juncker, the newly elected commission president, said in his first major address of 2015. “But that crisis still leaves a nasty legacy: high unemployment, high debt, tight access to finance. We risk leaving a scar on society.”
With the prospect of political instability looming in Greece, the eurozone is also bracing for what could become a major Franco-German spat over the future of the bloc’s economic policy making.
The combination of political instability and falling prices have raised the prospect that jittery consumers and corporate boardrooms will further scale back spending and investment plans — causing growth to slow even further.
“We see the beginnings of a new phase in the lingering eurozone crisis, where the worst may be behind us, but where certain issues remain ahead,” wrote Standard & Poor’s in a recent report on the eurozone.
The response from Brussels has been a stimulus plan that aims to use €21bn in EU guarantees to raise €315bn in private capital over the next three years that will be invested in public infrastructure projects. Although the plan has been broadly welcomed, similar schemes have failed to spur economic growth in the past.
© Financial Times
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