Europe: Persisting Obstacles to Better Times

A major adverse factor for the European economy is the continuing high level of unemployment. The rate in the euro area averaged 12% for most of 2013 and so far this year has only eased slightly. Getting redundant workers back into employment has been a tough task and only recently have there been improvements in job creation and opportunities for the long-term unemployed. It will take some time for economies such as Spain and Greece to return to the levels of employment that were taken for granted just a few years ago.

Additionally, the severe dearth of employment among the young has severe social and political implications that will reverberate for years to come. A lack of inclusion could continue to push those affected further towards the right of the political spectrum and into the arms of parties opposed to greater European integration and harmonisation. This, in turn, could lead to greater economic self-interest by countries and possibly jeopardise the chances of a region-wide recovery.

The continued crisis in Ukraine and the aggressive role of Russia in the region has also placed a question market over the course of the European economy. Besides the uncertainty any Russian intervention might create, Europe also has to contend with the fact that Russia is a leading energy supplier to the region. Many EU countries would be unable to find cost-effective alternatives if supplies were reduced or halted in response to sanctions or for some other reason. An energy crisis is the last thing a fragile European economy needs at this point in time.

Another impact of the crisis will be on the performance of European companies that are active in Russia. For example, banks with home countries such as France and Austria have a strong presence in Russia and could find themselves in a no-man’s land in the event that the crisis worsens. The Russian economy itself is also expected to be impacted and this, in turn, is likely to depress export volumes from Europe into Russia.

Turning next to economic growth, there is undoubtedly a good prospect of improving growth across Europe. Gross domestic product (GDP) across the EU edged higher by just 0.1% on average in 2013, but the growth figure is expected to rise to 1.5% in 2014 and 2% in 2015. Some countries such as the UK and Poland are expected to grow by 2.5% or more in 2014. There is an increase in domestic demand across the region and consumer confidence is also on the rise.

With an improvement in the global economy in 2014, the demand for European exports is also expected to rise overall. This is matched by a rise in the investment growth rates, as factors such as economic uncertainty and financing conditions ease. The main downside as regards economic growth is the fact that some of the region’s peripheral economies such as Cyprus and Slovenia are not expected to emerge from recession until after this year and hence could lead to further economic uncertainty.

Twin Threats

According to the European Commission (EC), financial market conditions have improved in the region and greater stability is expected in 2014. However, a major area of concern is financial fragmentation, especially within the European lending market. If this problem continues, it is expected to impede the transmission of monetary policy and could hurt the prospects of small and medium-sized enterprises (SMEs), which have felt the brunt of the economic crisis since 2008.

Another important issue that has been recently raised in the European context is that of corruption. According to EC estimates, high levels of bribery and corruption cost the European economy more than €120bn or US$162bn annually.
An EU-wide study
found that 76% of Europeans surveyed thought that corruption was a widespread problem, with the percentage for individual countries as low as 20% for Denmark but a massive 99% for Greece.

There have been questions raised over the anti-corruption record of the EC itself in recent years, with experts suggesting that it is not doing enough to reduce to address the problem. An important aspect to corruption is the lack of regulation over the relationship between politicians and industry. Great efforts to address this issue could result in a short-term impact on the growth prospects of European businesses – although the economy could gain overall in the longer-term.

This article has discussed a number of current areas of concern for the European economy. These highlight the relevance of building on a fragile recovery for the region. Yet it is also important to remind ourselves that Europe is much better-placed from both an economic and financial point of view than it was just two years ago when the sovereign debt crisis still weighed on prospects.

When combined with the fact that the global economy is expected to improve on its 2013 performance this year, the prospects for Europe seem good. It is vital that its policymakers realise they have a window of opportunity and try to make the most of it, by reducing systemic rigidities and ensuring that any benefits of economic growth are spread around and not concentrated in only a few economies or limited to certain sectors. It is also important to provide opportunities to those who have been without work for long periods, which also means addressing the high levels of youth unemployment.

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