The recovery is broadening. GDP growth in the EU, which has turned positive in the second quarter of  last year, is increasingly driven by domestic demand. This year, domestic consumption and investment  are set to expand further, reducing the dependency of the recovery on the external sector. Growth has also  returned in many of the vulnerable Member States, and growth differentials across EU Member States are  expected to narrow. 

 

At the same time as we are observing more balanced growth prospects across the EU, the global economy is becoming more differentiated. Among advanced economies, the US has displayed a strong resilience to domestic fiscal shocks and the related uncertainty. Assessing the upswing there as sufficiently robust, the Federal Reserve has initiated the gradual shift towards a less expansionary monetary stance. In turn, the prospect of a gradual normalisation of benchmark interest rates and global liquidity has led international investors to discriminate more strongly among emerging market economies, and capital flows to countries with sizeable external imbalances and domestic weaknesses have dried up. This reallocation of capital flows has led to financial market tensions in mid-2013 and again in early 2014. They are a reminder that the global economy remains vulnerable, even as growth and trade are accelerating. 

 

Within the EU economy, welcome recent improvements point to a path towards gradual normalisation. However, the consequences of the crisis are still holding back growth and job creation and could do so for some time. On the one hand, there are positive developments on several fronts. After years of necessary front-loaded fiscal consolidation, the aggregate fiscal stance is now close to neutral, although efforts are still required in a number of Member States. The ECB's comprehensive assessment of the banking sector provides an opportunity to finalise the overdue repair of bank balance sheets that is a precondition for 

overcoming financial fragmentation in the euro area and for getting credit to support the real economy. 

 

There are first signs that recent reforms in a number of Member States start bearing fruit as they facilitate internal and external adjustment and, crucially, improve the prospects for employment growth. On the other hand, as long as debt in several sectors of the economy remains too high, unemployment is at record levels and the adjustment of previous imbalances is incomplete, there is a serious risk of growth remaining stuck in low gear. Indeed, should the impetus for reforms at EU and Member State level falter, we would squander the opportunity to put the EU economy back on a higher growth trajectory. The present very low inflation - well below the ECB definition of price stability - could exacerbate the risk of protracted lacklustre growth if it becomes entrenched. Disinflation may have the positive effect of improving real incomes and supporting demand. However, it also makes the competitiveness adjustment in vulnerable Member States more challenging, as the required negative inflation differential to the rest of the euro area could adversely affect debt dynamics.

 

Going forward, much depends on the stability of inflation expectations for the medium term. Should they shift lower, the corresponding increase of real interest rates and the debt burden would make it harder for growth to accelerate. 

 

Making 2014 the first year of a sustained recovery therefore requires continued and determined policy efforts: bold structural reforms in both vulnerable and core countries to tackle slow growth and facilitate rebalancing via demand rotation; full and effective implementation of the Banking Union to overcome financial fragmentation, sever sovereign-bank links and unlock credit in support of the recovery; improvement in the quality of public finances to boost investment and favour job creation. It can be done, provided that policy-makers at national and EU level do not mistake the recent signs of improvement as 

definite normalisation. There is still some sailing to do before we reach harbour.

 

Winter Forecast

 

Further information

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Speaking at the press conference, VP Rehn concluded with the European growth map for 2014/15.

"The recovery in Europe is expected to be broad-based as I said, across EU Member States as economic activity has also started to strengthen in the vulnerable countries.

Internal and external adjustment in vulnerable Member States is progressing, underpinned in many cases by significant structural reforms that are starting to bear fruit. Ireland is seeing increasingly robust employment growth. The economic recovery is firming in Spain and Portugal, and a moderate rebound is expected to start this year in Greece. Greece has reached current account surplus for the first times since 1948.

Among the bigger economies, a steady expansion driven by domestic demand is expected in Germany. In France economic growth is only slowly recovering, supported by a timid pick up in private consumption. Rather mild economic recoveries in the Netherlands and in Italy are set to be driven by net exports and investment. Strong growth is foreseen in the United Kingdom and in Poland on the back of increasingly robust domestic demand. This year, 2014, only Cyprus and Slovenia are still expected to register negative annual growth rates.

As you can see from the growth map for 2015, which looks greener than for this year, all EU economies are expected to be growing again by next year.

All in all, the worst of the crisis may be behind us, but this is not an invitation to be complacent. Our forecast assumes the continued implementation of agreed policy measures both at European level and Member State level in order to advance the necessary economic adjustment in Europe and in the Member States. To make the recovery stronger and create more jobs, we need to stay the course of economic reform. This message was clearly underlined by the G20 and our partners in the G20 last weekend in Sydney.

We will take a closer look into the remaining areas for structural reform to address macro-economic imbalances next week in Brussels. On Wednesday, 5 March the Commission will adopt its conclusions from the in-depth reviews that were launched for 16 countries under the Macro-economic imbalances procedure last autumn, and this concerns both the deficit – or now mostly former deficit – countries that have been restoring their economic competitiveness, and the surplus countries that face the challenge of strengthening domestic demand and investment. We will for instance present these in-depth-review for countries like Italy and France, as well as for Germany.

Full speech