Blog Post

How can Europe escape recession in 2015?

A clear priority for 2015 will be to manage proactively the fallout from a possible continuation of the conflict with Russia. In addition, the euro area must amplify its efforts jumpstart growth and create new job opportunities. To grow, Europe needs to invest.

By: Date: December 23, 2014 Topic: European Macroeconomics & Governance

2014 will be remembered for two major unexpected developments. First, the European Union was caught by surprise by the return of geopolitics. The annexation of Crimea, the military conflict in Ukraine and the increasing tensions between Putin’s Russia and western leaders were unexpected. The conflicts in Iraq and Syria and the rise of ISIS extremists found the West equally unprepared. One can speculate if the economic and political weakness of the West in recent years has contributed to the rise of alternative political concepts. But certainly, European Union countries have realised that these conflicts on their doorstep matter. From an economic point of view, these events have arguably had negative effects on confidence and have – together with the sanctions imposed on Russia – contributed to disappointing growth figures. Also of concern are the direct effects on trade and especially on the security of energy supply.

Second, the economic performance of the euro area has fallen on the wrong side of official forecasts. In November last year the European Commission predicted real GDP growth of 1.1 percent for the euro area in 2014, but these numbers have been revised downward to 0.8 percent. Inflation has been subject to similar revisions, and is dangerously low to achieve debt sustainability and price adjustment. Some progress has been made with unemployment but it is slow and numbers continue to disappoint in Italy in particular.

Given this backdrop, it is clear that Europe’s New Year’s resolution should be to implement policies needed to reduce military conflicts in EU neighbouring countries, and to increase growth and jobs.

For sure, a clear priority for 2015 will be to manage proactively the fallout from a possible continuation of the conflict with Russia. I would certainly emphasise the importance of reducing our collective dependence on gas imports and strengthening our single market for energy. In particular, we should ensure the energy security of all EU member states. The European Commission’s work on the so-called Energy Union is central in this respect. Constantly reviewing whether the sanctions against Russia are actually effective is also essential to justify their continuation, despite their negative impact on economic growth in the EU and in Russia.

To grow, Europe needs to invest

Furthermore, the euro area must amplify its efforts jumpstart growth and create new job opportunities. To grow, Europe needs to invest. The decline in investment in the last seven years has been substantial and the EU is now well below long-term investment trends. A major reason for such weak investment is a lack of trust and confidence. Consequently, one of the most important challenges for policymakers will be to focus on increasing private-sector confidence. Predictability of policy is central. Even more important is regaining trust among European partners.

Such lack of trust is partly caused by different intellectual traditions and, by diverging interpretations around the main causes of the current crisis and contrasting views regarding the appropriate measures needed to tackle it. These differences in analysis between mostly Germany-based and other economists translate into different assessments and undermine mutual trust. This mistrust among European partners is in turn perceived negatively by investors.

We need to acknowledge that the euro area has both significant structural problems and significant demand-side problems

We need to overcome the polarisation of this debate and acknowledge that the euro area has both significant structural problems and significant demand-side problems. Low productivity growth and substantial divergences in competitiveness and unit labour costs in different EU countries call for bold structural reforms. Such reforms should include, for example, better training to help jobseekers find new jobs in different sectors. These reforms will be mostly national but also new initiatives that deepen the single market, for example for digital services, are also fundamental to boosting productivity and creating new investment opportunities.

Initiatives that help kick-start demand in the euro area are equally important. The European Central Bank has been far too slow to react to the deteriorating inflation outlook and needs to be more proactive in 2015. However, monetary policy alone will not be sufficient. As well as improving the framework conditions for private investment, the EU should mobilise public resources for public investment projects. While the investment plan set out by European Commission president Jean-Claude Juncker is an improvement in this respect, the public resources earmarked are clearly insufficient and a top-up will be needed. The EU will also have to become bolder in tackling the banking problems that still weigh on credit and lending in a number of countries. More policy initiatives are required to re-ignite growth in the EU.

This article was published by Rzeczpospolita in Poland, by Napi Gazdaság in Hungary, by O Globo in Brasil and will be published by El Pais in Spain, by Capital in Bulgaria, by Kathimerini in Greece and by Caixin in China.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read about event More on this topic

Upcoming Event

Feb
27
12:30

Bruegel - Financial Times Forum: The future of euro-area governance

The third event in the Bruegel - Financial Times Forum series will look into the future of euro-area governance.

Speakers: Maria Demertzis, Gideon Rachman, Manfred Weber and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Blog Post

Trust in the EU? The key obstacle to reform

The challenges that Europe faces both from within and from outside require immediate, concerted counter-efforts. While efforts to advance the European economic architecture are desirable and useful, can Europe realistically attempt to integrate further on the basis of such little trust?

By: Maria Demertzis Topic: European Macroeconomics & Governance Date: February 9, 2018
Read article More on this topic More by this author

Opinion

Your job description, Mr. Centeno

Here’s how you run the Eurogroup.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: January 30, 2018
Read article Download PDF More on this topic

External Publication

Reconciling risk sharing with market discipline: A constructive approach to euro area reform

This publication, written by a group of independent French and German economists, proposes six reforms which, if delivered as a package, would improve the Eurozone’s financial stability, political cohesion, and potential for delivering prosperity to its citizens, all while addressing the priorities and concerns of participating countries.

By: Agnès Bénassy-Quéré, Markus K. Brunnermeier, Henrik Enderlein, Emmanuel Farhi, Marcel Fratzscher, Clemens Fuest, Pierre-Olivier Gourinchas, Philippe Martin, Jean Pisani-Ferry, Hélène Rey, Isabel Schnabel, Nicolas Véron, Beatrice Weder di Mauro and Jeromin Zettelmeyer Topic: European Macroeconomics & Governance Date: January 17, 2018
Read article More on this topic More by this author

Opinion

Opportunities and risks in Europe in 2018

The new year could very well see the positive story of 2017 continue in Europe – but a number of looming policy and political problems cannot be ignored.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: December 30, 2017
Read article More on this topic

Blog Post

Brexit, phase two (and beyond): The future of the EU-UK relationship

Whether it looks more like ‘CETA-plus’ or ‘EEA-minus’, the trade deal that emerges from phase two of the Brexit negotiations should not be the limit of ambition for future partnership between the EU and the UK

By: Maria Demertzis and André Sapir Topic: European Macroeconomics & Governance Date: December 13, 2017
Read article More by this author

Blog Post

Latest data shows developing trends in the European Central Bank’s refinancing operations

The stock of liquidity supplied through the ECB’s open market operations has remained relatively stable, though there is a clearer change in the country composition.

By: Konstantinos Efstathiou Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: December 12, 2017
Read article More on this topic More by this author

Blog Post

The eurozone medley: a collection of recent papers on the future of euro-area governance

Our scholars Grégory Claeys, André Sapir, Dirk Schoenmaker, Nicolas Veron and Guntram B. Wolff, explore the next steps needed to create a more functional and coherent economic governance framework.

By: Bruegel Topic: European Macroeconomics & Governance Date: December 6, 2017
Read article More on this topic More by this author

Opinion

The European Commission should drop its ill-designed idea of a finance minister

Beyond the opposing ideas of Jean-Claude Juncker and Wolfgang Schäuble for future euro-area governance, Guntram Wolff explores how alternatives such as a reformed Eurogroup might yield more effective fiscal policy-making.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: December 4, 2017
Read article Download PDF More on this topic More by this author

Policy Brief

Beyond the Juncker and Schäuble visions of euro-area governance

Two diametrically opposed visions of the euro-area architecture have been put forward. Departing from both Juncker’s and Schäuble’s proposals, the author identifies new ideas to develop the euro-area governance

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: December 1, 2017
Read article More on this topic More by this author

Blog Post

German wages, the Phillips curve and migration in the euro area

This post studies why wages in Germany have not borne strong increases despite a relatively strong labour market. I list four reasons why announcing the death of the Phillips curve – the negative relationship between unemployment and wage growth – is premature in Germany. One of the reasons I report is substantial immigration from the rest of the EU.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: November 29, 2017
Read article Download PDF More by this author

Parliamentary Testimony

Croatian Parliament

After the crisis: what new lessons for euro adoption?

Key learning for euro adoption lies within the experience of southern euro member states and the macroeconomic performance of euro ‘ins’ and ‘outs’ among newer member states. Zsolt Darvas discusses promising signs for eventual euro adoption in Croatia and the unsuitability of the Maastricht fiscal criteria for joining the euro, in his speech delivered at an event organised in the Croatian Parliament on 15 November 2017

By: Zsolt Darvas Topic: Croatian Parliament, European Macroeconomics & Governance, Testimonies Date: November 20, 2017
Load more posts