How is Europe’s economy doing? It depends on who you ask.
A recent report from the International Monetary Fund anticipates Europe’s 2020 GDP will experience its lowest rate of growth since 2013 – an increase from 1.4 to 1.8 percent – though better numbers are predicted for emerging countries.
For France, the eurozone’s second largest economy, strong domestic stimulus indicates that things are going well. The country has recently seen growth due, in part, to expanded factory manufacturing activity in the second half of this year, as well as increased consumer spending. And though slight, output rose by 0.3 percent in the third quarter, beating out forecasts that had predicted growth of 0.2 percent.
Meanwhile, President Emmanuel Macron’s 10 billion euro stimulus package, aimed at addressing the yellow jacket protestors and mostly going towards benefits for minimum wage workers, helped fuel economic growth. The country has also promised to cut taxes by more than 10 billion euros in 2020.
Raphael Brun-Aguerre, a senior economist at J.P. Morgan, noted that Macron’s reforms have assisted the resilience that France is experiencing. “Measures enacted in recent years…have contributed to make the French labour market more flexible and have lowered labour costs for corporates”, said Brun-Aguerre.
Because France’s resilience comes exclusively from domestic demand rather than trade, it is evident that “government handouts to households can provide an effective and welcome boost to the economy in the face of external shocks”, says Maeva Cousin, a euro-area economist at Bloomberg Economics. “After banking most of the fiscal giveaways in the first half, French consumers opened their wallets, with car purchases in particular helping to offset the deterioration in net trade.”
France may just be the exception, however. Economic sentiment across most of the eurozone is fairly pessimistic about the economy, especially in Germany. Even still, industry morale in France is low as that sector feels the bite of US trade actions, the US-China trade war, and EU-targeted tariffs.
“The trade war is clearly weighing on business sentiment, and the new tariffs against some French products are a negative in that respect”, said Gilles Pradere, Senior Fixed Income Manager at Geneva-based firm RAM Active Investments. “But there are certainly other factors at play such as the transition in the auto sector due to new regulations and a slowing Chinese economy.”
Germany Braces Itself
By contrast, export-dependent Germany – the eurozone’s largest economy – is currently facing a slowdown and may be on the brink of a recession. One reason for this lies in its inability to absorb the shocks from American President Donald Trump’s “America First” trade policies and the upsets in global trade that result.
In 2019, unemployment in the country increased faster than expected with the economy decreasing by 0.1 percent in the second quarter. Experts warn that exports could shrink by 0.5 percent in 2020, which would be a first since the financial crisis.
Germany is expected to receive 4 billion euros more in tax revenue this year than they had initially predicted, and incoming European Central Bank chief Christine Lagarde has called for the country to use its budget surplus to boost growth.
Speaking to France’s RTL broadcaster, Lagarde remarked that “Those that have the room for manoeuver, those that have a budget surplus, that’s to say Germany, the Netherlands, why not use that budget surplus and invest in infrastructure? Why not invest in education, why not invest in innovation, to allow for a better re-balancing?”
Finance Minister Olaf Scholz, however, has rejected the notion that Germany is not investing back into its society enough and pointed to record levels of public investment projects. Nor is Scholz willing to stray from the state policy of no new debt – even to further boost such investment projects – which is consistent with the country’s constitutionally-enshrined fiscal rules that only allows for a small budget deficit.
Despite positive growth, there is concern from the European Commission over France’s 2020 budget as their plans do not comply with the structuring reforms and debt reduction the country had promised to deliver. And yet, because of its relative economic strength, it is unlikely that Brussels will come down too hard on France out of apprehension of potentially undercutting growth the eurozone needs.
Outgoing European Central Bank chief Mario Draghi has suggested that for “countries where public debt is high, governments need to pursue prudent policies and meet structural balance targets, which will create the conditions for automatic stabilisers to operate freely”. This means that instead of pressuring France to stick to the letter of their reform agreement, it might benefit everyone if the EU relinquishes a bit in short-term compensation. This would allow the French government space to limit the social unrest – predicated by economic unsteadiness or unpopular pension reforms – expected over the next two years.
While forecasts anticipate a slowdown across Europe overall, France can, for now, continue to feel positive about its recent economic successes.