Europe’s Dark Cloud Over the World Economy by DESMOND LACHMAN Even before the coronavirus outbreak, troubles have verge of an economic recession. been coming to the European economy not as single spies but While the U.K. did leave Europe on January 31, it still in battalions. Worse yet, these troubles have come at a time has to negotiate a permanent economic relationship with the that the European Central Bank is running out of monetary European Union during the one-year transition period that policy ammunition and at a time that the German government ends in December 2020. Judging by Boris Johnson’s hardline remains wedded to a balanced budget policy. Brexit position and by his insistence that the U.K. will not All of this does not bode well for either the European or seek an extension in the negotiation period, investors are the global economies in the year immediately ahead. bound to continue worrying about the U.K. crashing out of the As it entered 2020, a striking feature of the European European Union at the end of the year. economy was that all four of its largest economies — Most troubling of all is Italy’s poor economic outlook. Germany, France, Italy and the United Kingdom — were Italy has the dubious distinction of having a lower per beset by meaningful economic or political difficulties. As capita income today than it did some 20 years ago. It also a result of these difficulties, in the last quarter of 2019 the has Europe’s second highest public debt to GDP ratio after overall European economy expanded by barely 0.1 percent, Greece and a relatively unstable government. This makes with France and Italy registering its economy particularly exposed negative growth rates. to any further slowing in the Unfortunately, with the fallout European and Chinese economies. In the last quarter of from the coronavirus epidemic With the Italian economy yet once about to hit the global economy, 2019 the overall European again contracting toward the end there is not much reason to believe of last year, one cannot rule out a economy expanded by that the economic or political recurrence of the Italian sovereign barely 0.1 percent, with difficulties besetting each of debt crisis in 2020. Europe’s four main economies will European policymakers have France and Italy registering clear up anytime soon. compounded earlier European negative growth rates. Indeed, the heavily exporteconomic downturns by the pursuit oriented German economy is all of a pro-cyclical fiscal policy. too likely to continue to be among With the German government those world economies most adversely affected by a slowing insisting on maintaining a balance budget and with the Chinese economy. With the coronavirus very likely to reduce European commission insisting that countries comply with the Chinese economic growth from 6 percent in 2019 to around 4 Eurozone’s budget deficit limits, there is little reason to think percent in the first half of 2020, Germany’s economy is bound that European policymakers will use budget policy to counter to take a further meaningful hit. At the same time, the Trump the next European economic downturn. administration’s continued threat to impose a 25 percent The likely lack of a fiscal policy response will again put tariff on European automobiles is likely to continue weighing the full burden of supporting an ailing European economy on heavily on Germany’s automobile sector. the European Central Bank. However, with policy interest Over the past year, France’s economic performance has rates already in negative territory, the ECB is bound to be very been weighed down by President Emmanuel Macron’s waning much less effective in jump starting the European economy political fortune and by widespread social unrest triggered than it was during the last Eurozone sovereign debt crisis. by his unpopular economic reform agenda. With Macron With Europe’s economy being approximately the same showing no sign of backing down on his deeply unpopular size as that of the United States, another European economic pension reform initiative, there would seem to be little reason slowdown would have a major effect on the global economy. to expect an early turnaround in the French economy. U.S. economic policymakers would ignore the current risks to Since the June 2016 referendum, Brexit has not been kind the European economy at their peril. RF to the U.K. economy. As investors fretted about the possibility that the U.K. could crash out of Europe without an economic Desmond Lachman is a resident fellow at the American deal, the U.K.’s economic performance lagged well behind Enterprise Institute. This column was originally published by that of its G-7 peers. By the end of 2019, the U.K. was on the InsideSources.com 8
RIPON FORUM February 2020
