Trump’s Policies Could Throw EU’s Economic Expansion ‘Off Track’, Warns European Commission

In contrast with recent forecasts, the Commission did not revise its figures for the eurozone upwards, signalling that growth is slowing down in the currency union.

“We take into account the slow-down for the last quarter. We think it is largely explained by temporary factors. But it does not change our outlook. Our economists are not renowned to be the most optimistic, but our analysis is that growth is solid and the phase of expansion that we know today is robust,” commissioner for Economic Affairs, Pierre Moscovici told reporters on Thursday.

The spring forecast predicts GDP growth of 2.3% and 2% in the eurozone for this year and 2019, as it was foreseen last February.

For the EU as a whole, output is now expected to accelerate by 0.2% more than previously forecast, and it will grow 2.5% this year and 2.2% in 2019.

After its Governing Council meeting last week, the ECB also concluded that there had been a “loss of momentum” in the euro area.

While the eurozone’s growth shows signs of slowing down, the US economy is picking up pace thanks to the tax reform adopted by Trump.

Both the euro area and the US grew by 2.4% last year.  But the American economy is expected to accelerate to 2.9% this year, before falling slightly to 2.7% in 2019.

Trump’s fiscal stimulus has turned into a risk in Commission’s eyes, as it could amplify the  impact of the protectionist measures recently announced by the US President.

“The combination of procyclical fiscal stance in the US and inward-looking trade policies represent a dangerous nexus in our view,” Moscovici stressed.

The fiscal stimulus would boost short-term growth, but also raises the risk of the US economy overheating and interest rates being raised faster than initially assumed. Moscovici believes that there could be “significant spillovers” if the US Fed’s decision chills investors worldwide, destabilizing markets and financial conditions.

“Market volatility is likely to become more prominent feature in the future because of recent policy developments,” Moscovici summarised.

The Commission also fears that the economic situation could worsen if the US trade restrictions undermine the viability of global value chains.

“The materialisation of these risks could throw the expansion off track in a European economy that has recently been more reliant on investment and exports”, wrote Marco Buti, the head of the directorate-general of Economic and Financial Affairs, in the preface to the forecast.

Good news

But despite the risks to the global economy having “sharply increased”, Buti said, the European economy is in a strong position to face them.

The number of employed persons is higher than ever. In addition, all eurozone economies will register a deficit below the 3% threshold this year for the first time since the financial crisis started a decade ago.

“This is an historic achievement,” Moscovici said.

Public investment is now expected to grow faster than GDP, although it still remains below the pre-crisis levels.

All member states will maintain strong economic growth this year and the next.

But in light of the recent indicators suggesting a slowdown to growth, Commission experts are assessing whether the loss of momentum is due to temporary factors, or there are limitations to growth.

The ECB’s governing council also spent four hours discussing this issue during its last meeting.

“The well-known difficulties of assessing the cyclical position in real time are not just a matter of academic debate,” wrote Buti.

“Whether and when full capacity is reached is a key determinant for the growth and inflation outlook, and is crucial for the orientation of macroeconomic and structural policies,” he added.

Both the Commission and the ECB believe that the slowdown is temporary and partly responds to constraints in the supply side, for example,  the lack of labour force in sectors such as construction.

The EU executive says that these structural weaknesses should persuade governments to adopt policies to increase labour market participation, improve education, and remove bottlenecks to infrastructure.

But in order to be more resilient, the Commission, the ECB and some member states want to strengthen the bloc’s economic and monetary union by completing the banking union and setting up new fiscal instruments to cope with sudden economic shocks.

EU leaders promised that they would come up with decisions by June European Council, but officials have lowered the expectations in recent weeks. The most ambitious parts of the package, including a European Deposit Insurance Scheme for banks and a eurozone budget, remain elusive because of the opposition of a dozen member states.

Supporters of the reforms have argued that the positive economic momentum and political situation offered a window of opportunity to move ahead. “But when dark clouds already gather on the horizon the task becomes urgent” said Buti.