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Political Worries Put European Economies at Risk – FT Poll

Political Worries Put European Economies at Risk - FT Poll

According to a Financial Times poll of leading economists, the Eurozone is at risk for 2019 and this risk is growing. Of course the risk is driven by factors both inside and outside the European sphere. All but one of the 24 economists placed growth for 2019 in the Eurozone between 1.0 and 1.8 percent while most pointed to the key risk as the United States and China trade tensions getting worse before getting better – why is this an issue for Europe? Well while global trade systems start to break down, the US and China are both massive importers of German products and as odd as it may seem, the country that will be hurt in trade wars is the one with the most exposure to trade. US GDP is reliant on export trade to the tune of 7 percent, while China is 28.5 percent and falling and Germany is a shocking 45 percent. 

As I type this the German economy is fading with recent manufacturing releases showing steady weakness over three months. This spells trouble for Germany in total war, a total trade war. 

However, the ECB, the European Central Bank reports economic expansion at 1.7 percent for 2019. This solid number, for recent European standards will be driven by lower unemployment and higher wages which will, over the year boost domestic spending. And with the ECB target of 2.0 percent for inflation, these economists are forecasting between 1.2 percent and 1.8 percent. Of course there was a spike in inflation but that was driven buy the rally in oil prices to approximately $70 per barrel, taking inflation to 2.0 percent in 2018. Still the underlying inflation rate remains at about 1.0 percent according to one economist surveyed. 

The right policy mix is now an issue in the Eurozone thanks to Italy and France. 

The recent tensions between Rome and the European Commission have been adding pressure to the entire zone as a populist leader and his government are saying that they are ready to spend, adding to the Commissions worries about the deficit. However, now that President Macron of France has capitulated to the protesters in Paris and 10 other cities, the deficit now comes in at 3.4 percent of GDP. Mr Macron will be forced to raise taxes, and in short, long-term problems will arise. The long-term negative fallout is worrisome as France and Germany are the core of the EU, the key players holding the system together. When they break the rules, as President Macron did, this makes it difficult for the European Commission to keep the system running as one unit. 

What is interesting is the number os economists who support the 180 degree change by President Macron. The Italian fiasco and the concessions by France are only going to make the future of the Eurozone a bit less clear. 

Team Classiarius 

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