Cementing Europe’s Recovery
Mareeg.com-BRUSSELS – During my current trip to Europe, I have been encouraged by the hope and
deeper sense of economic and financial calm that has arrived this spring. With risk
spreads compressing markedly, the region’s financial crisis has been relegated to
the history books, and the region is again attracting the interest of foreign
investors. Consumer confidence is recovering as well, and businesses are again
looking to expand, albeit cautiously. Economic growth has picked up and
unemployment, while still alarmingly high, has stopped increasing in most
Remarkably, all of this is occurring in the context of a major geopolitical crisis
to the east, following what the Financial Times rightly pointed out constitutes “the
first annexation of another European country’s territory since the Second World
War.” Equally disturbing, Russia’s annexation of Crimea has occurred with stunning
ease – indeed, simply “with the stroke of a pen,” as the FT put it. And neither
Western Europe nor the United States can even pretend to provide a military
counterweight to Russian actions in Ukraine.
Yet, rather than disrupt its growing confidence and composure, the Ukrainian crisis
has been a catalyst for renewed political cooperation and solidarity within Western
Europe. It has also fostered closer relations with the US at a time when political
leaders face inevitable headwinds in completing historic negotiations on the
proposed Transatlantic Trade and Investment Partnership (TTIP), aimed at boosting
economic ties in a manner consistent with a strengthened multilateral system.
Europe badly needs all of this good economic and financial news. The region has only
just exited a recession that has devastated many livelihoods. Far too many citizens
are still trapped in long-term unemployment, while a distressing number of young
people struggle to secure a job – any job.
The region’s ongoing recovery is also good news for a global economy that has yet to
rebalance properly and fire on all available growth cylinders. US growth, while
edging up, is still below its potential, let alone high enough to offset prior
shortfalls. After a short burst, Japanese growth has begun to sputter. And several
systemically important emerging economies (including Brazil, China, and Turkey) have
slowed, while their transitions to new growth models remain incomplete.
But Europe’s renewed sense of hope and confidence, however encouraging, is not
sufficient – at least not yet – to produce appreciable welfare gains for current and
future generations. A few things need to happen rather quickly – specifically, over
the next several weeks and months – if the continent is to minimize the risk of
slipping into another prolonged period of under-performance and additional
asymmetrical downside financial risk.
Let us start with the immediate geopolitical threat. To put it bluntly, Europe’s
economy, and even more so the economies of Russia and Ukraine, is not particularly
well positioned to weather a further disorderly escalation of tensions. Enlightened
diplomacy needs to replace the Cold War-style posturing and rhetoric that have
re-emerged. Further escalation would mostly likely cause the West to impose deeper
economic and (critically) financial sanctions on Russia, followed by Russian
counter-sanctions that would disrupt the energy flow to Europe. All of this would
tip Europe as a whole into recession and renewed financial turmoil.
Second, the European Central Bank needs to pivot from financial-crisis prevention –
an area where it has performed impressively – to striking the delicate balance of
supporting growth (and countering currency over-appreciation) without fueling
excessive risk taking. This may well involve renewed experimentation, which would
again take many policymakers outside their comfort zone.
Third, with European institutions acting as catalysts, political leaders will need
to reinforce efforts to place the eurozone as a whole on a firm footing. This
requires complimenting monetary union with deeper political integration, better
fiscal coordination (where progress has been painfully slow), and a proper banking
union (last month’s agreement should be treated as a stepping stone, not the
Fourth, at the national level, individual countries need to continue to rebalance
their policies with a view to achieving the trifecta of structural reforms, solid
aggregate demand, and fewer debt overhangs.
Finally, anti-establishment parties must not dominate the European Parliament
election in May. Most of these parties are committed to greater national isolation
and, at least initially, would work hard to halt and reverse recent gains made on
regional economic and financial integration.
That is quite a to-do list, to be sure, especially given that it only covers the
next few weeks and months. Yet every item on it is achievable, and progress on each
would help to ensure that Europe’s encouraging spring leads to a bountiful harvest
of economic opportunity, growth, and jobs, while reducing the risk of a hot
political summer and a more frigid economic winter.
Mohamed A. El-Erian is Chief Economic Adviser at Allianz and a member of its
International Executive Committee. He is Chairman of President Barack Obama’s
Global Development Council and the author, most recently, of When Markets
Copyright: Project Syndicate