The clock is ticking for Europe
Last week saw a second landslide rejection of the Prime Minister Theresa May’s Brexit deal, and as we head to press, uncertainty remains high. May’s strategy of essentially running down the clock in a bid to secure her deal has again failed at a high cost to the British economy, and to the rest of Europe.
It comes as no surprise that the ECB listed Brexit uncertainty as one of the reasons motivating the downgrade to its latest economic outlook. The ECB now forecasts euro area GDP growth at just 1.1% for 2019 compared to 1.7% in the previous forecast from December. Uncertainty related to global trade, specific issues in individual member states and temporary disruptions to the car industry were amongst the other factors cited to explain the revision. Looking ahead to 2020, the ECB assumes that uncertainty will lift paving the way for economic growth to pick up to 1.6% in 2020. Risks to this outlook, however, remain firmly titled to the downside. In recognition of this reality, the ECB shifted its policy stance to a more accommodative stance at the March meeting, extending its forward guidance to keep rates on hold until the end of 2019 and announcing a new TLTRO that could even see the ECB’s balance sheet expand anew.
ECB President Draghi, however, once again warned that if the euro area is to reap the full benefits of the monetary policy measures, other policy areas must contribute more decisively to raising the longer-term growth potential and reducing vulnerabilities. The annual assessment of member states’ progress on economic and social priorities released by the European Commission a few weeks ago offers a depressing read in this context. While progress varies across individual member states, the reality is that only 39% of country specific recommendations have been adopted since July 2018, compared to an average of 59% under the current Commission from 2014 to 2018 and 69% over the period 2011 to 2018. Overall, this suggests that member states achieve most progress when “forced” to reform. A similar observation can be made at the level of the euro area where the crisis catalysed significant progress delivering notably the European Stability Mechanism and a Banking Union in 2012. Since then, progress has been all too slow. Consensus is, moreover, that the Spring Council on 21-22 March is unlikely to deliver any of the required quantum leaps.
Looping back to Brexit, it is worth recalling that the muddled tacking of the European debt crisis may well have contributed to the Brexit vote, both directly and indirectly. We note that net immigration from the rest of the European Union to the United Kingdom soared in the wake of the debt crisis from around 60,000 prior to the crisis to a peak of just over 180,000 in 2015 but has declined since the Brexit referendum in June 2016, with the latest data point clocking in at just under 60,000.
The question now is how the European electorate will cast their verdict at the elections to the European Parliament from 23 to 26 May. While opinion polls suggest that the euro-sceptic parties are likely to make significant gains, securing around as much as 30% of the vote according to some polls, this would still leave them well short of a majority. The concern is that the new European Parliament could prove more fragmented making it harder to secure compromise.
With the euro area likely to face an economic downturn over the coming five years and ECB policy tools already looking quite exhausted, the clock will be ticking fast for the new Commission and Parliament. European leaders would do well to draw important lessons from Brexit and offer European citizens a positive vision for the future of European integration and then move swiftly to implement this. The reality, however, is that the political divides across the region remain significant pushing such hopes at bay and leaving the weakest member states vulnerable in the event of a new downturn.
As European look across the Channel with a sense of dismay and disbelief at the Brexit process they would do well to remember the urgent need for reform closer to home as they gather for the Spring Council.
Michala Marcussen, Societe Generale’s Group Chief Economist