The European economy is indeed at a crossroads, grappling with the urgent task of rebalancing its growth model away from dependence on external demand. This shift is essential for reducing reliance on global trade, which has proven to be a precarious foundation given recent geopolitical tensions. Experts suggest that addressing internal trade barriers, enhancing skills, and improving savings rates will be critical steps in fortifying the region’s economic resilience.
Rebalancing Towards Domestic Demand
For decades, the main driver of Europe’s economic development has been exports. This model has created a sustainability concern. Indeed, every analyst we’ve spoken to agrees that a shift to domestic demand is both necessary and desirable for long-term stability. This external rebalancing strategy aims to lower the European economy’s trade surplus. Given increasing global market competition especially from China, this surplus is increasingly unsustainable.
Furthermore, using fiscal stimulus alone would not be enough given current European budget rules. Given the generally small size of the EU budget, there is little room for expansive fiscal measures. Consequently, European governments have needed to pursue other tactics to increase domestic demand while staying within budgetary limits.
The realisation of the Savings and Investment Union (SIU) is seen as an important complementary process to fostering this transition. By promoting a higher culture of savings and investment, Europe can restore its economic edifice on a stronger pillar and massively raise its growth chances. This transformation will be key to fostering deeper domestic demand and in the process, lowering exposure to external shocks.
Internal Trade Barriers and Economic Growth
The TTIP’s promise of reducing internal trade barriers across Europe represents a huge economic opportunity. In fact, experts believe these reductions could add $3,400 to GDP per capita. Their counterfactual prediction is an increase of about 7 percentage points. This possible expansion highlights the need for an integrated single market that fosters free-flowing commerce across all member states.
In Europe, the value of Europe’s exports to the United States is now affected by the fear of European markets closing. To address this challenge, European countries need to centrally build up their national market forces. Strengthening intra-European trade can help regain scale within the single market and mitigate the risks posed by external dependencies, particularly from competitive economies like China.
Germany’s newly unveiled stimulus package is central to understanding the bigger economic picture. It could add an additional quarter point to the European GDP by 2026, according to projections for this package. GDP by 0.5% in both 2027 and 2028. Such measures illustrate Germany’s outsized influence within the EU, as well as its potential to lead Europe in accelerating collective economic growth.
Competitive Challenges from Global Markets
The competitive landscape in Europe is changing rapidly. China becomes an even more fearsome competitor, given their large production scale, relatively low energy costs (mainly coal), lax business regulations, and emerging economic technology. As European countries try to retain their competitive advantage, they will need to face these challenges directly.
The further complications of possible US trade restrictions are a concern. If the US market becomes completely closed to imports, Europe will be hit harder by Chinese products flooding their home markets. European countries need to take steps to re-boot their own national economies. Simultaneously, they must steer through a rapidly stiffening global race.
Analysts are rising to meet these challenges. In the meantime, they forecast the euro to appreciate, up to its fair value some time around 2021 at about $1.15 per euro. This expected improvement would further fuel the drive to rebalance the European economy towards more sustainable growth.
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