11 May 2017

Financial Times: The EU economy from recovery to resilience

Over the past year or so, an unaccustomed sentiment has spread through the chancelleries of Europe: a sense of confidence in the EU’s economies. The sovereign debt crisis has receded — with the unfortunate exception of Greece, which nonetheless appears well-insulated from the rest.

Unemployment, the bane of Europe’s economics and often its politics, has fallen.

Recently came the latest increment of good news, when the European Commission revised up its projections for growth and tilted the risks further away from the downside. Although quarterly growth rates are generally too volatile to read very much into them, it is at least symbolically satisfying that the eurozone economy as a whole appears to have outgrown those of both the US and the UK in the first three months of the year.

The irony is that the upswing owes a lot to official European rules and orthodoxies being ignored rather than followed. Much of the credit should go to the European Central Bank’s extraordinarily loose monetary policy, which has done its job of prodding the reluctant and sluggish EU economies into a cyclical upturn.

If the European authorities really want to address the weaknesses in the eurozone, they should attend to the financial system rather than the macroeconomy. The biggest threat to EU economic stability right now is Italy, and specifically the risks arising from its banking system. If the EU is to fulfil its plan of extending the banking union with a deposit insurance scheme, it needs to build confidence that national authorities will move promptly to resolve any problems that arise, something Rome has failed to do.

It is much harder to address such issues than to indulge in another round of public grandstanding about fiscal deficits. But the eurozone sovereign debt crisis was, in essence, caused by excessive lending rather than fiscal profligacy, and extending the banking and capital markets unions is hugely important to ensure the resilience of the EU economy in future.

For once, and for the moment, the EU economies are doing well. This would be an excellent time to make sure that they are robust enough to withstand the downturn that will inevitably come at some point.

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