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08 June 2016

Europe: Grounds for Optimism? 

By Robert Greil

Eight long years after the start of the global financial crisis, Europe has, at last, officially recovered.

In the first quarter of this year, eurozone GDP increased 1.6% year on year, in line with the 2008 peak recorded shortly before the start of the financial crisis. During the same period, the broader EU economy expanded by 1.8%.

In Germany, GDP grew at a robust quarterly rate of 0.7%, equivalent to 1.6% year on year, while French GDP expanded by 0.6% – marking the third consecutive quarter of growth for the eurozone’s second-largest economy.

Amidst Greece’s never-ending debt problems, Spanish political paralysis, the UK’s looming Brexit referendum, a continent-wide refugee crisis and heightened fears of terrorism – all of which are contributing to the rise of far-right parties – not everyone believes that such positive figures present grounds for longer-term optimism.

Indeed, the global growth outlook remains subdued, with expansion forecast to stall at 3.2% this year, barely above the 3.1% recorded in 2015, as emerging markets continue to underperform.

Despite such challenging external conditions and myriad potential downside risks, Europe’s economy appears increasingly sound.

Consider that, between 2010-15, US GDP expansion averaged 2.1%, nearly double the rate of European growth over the same period. Since then, Europe’s economy has accelerated as the US economy has begun to cool slightly.

Recent data points to generally stable growth in most major European economies, led by Germany. Still more encouraging are the lower unemployment rates in the region’s two major pillars, Germany and the United Kingdom, where unemployment now stands at 5-6%, compared to the current 8.7% EU average, a seven-year low.

In May, the most recent flash Economic Sentiment Indicator, which measures consumer confidence, showed clearly positive sentiment – rising by 0.7 points in the eurozone and 0.5 points in the broader EU.

Indeed, both private-sector and consumer optimism rose to a four-month high in May. Retail sales are now growing at a healthy annual 2% average, while auto sales in Europe have now risen for 32 straight months.

Although government spending should increase in the coming years, capital expenditure (capex) – an indication of business investment and future economic health – remains a worry, as global uncertainty continues to impact bank lending.

Despite the European Central Bank’s zero interest rate policy and ongoing quantitative easing, access to capital continues to prove challenging, especially in southern Europe, even as banks continue to relax credit standards on loans to enterprises.

Meanwhile, although overall unemployment figures continue to decline, youth unemployment remains stubbornly high – averaging 18.8% in Europe, including 51% in Greece, 45% in Spain and 37% in Italy.

Despite such ongoing structural challenges, lagging reforms and high debt levels in countries like Italy and Greece – and deficits in Spain and Portugal greater than the EU’s 3% threshold – fears of a renewed euro crisis remain, at least for now, unfounded.

Major political risks do lie ahead, led by the June 23rd Brexit referendum. However, when reviewing the outlook for Europe’s economy, we see grounds for optimism.


Mr. Greil is Chief Strategist at Munich-headquartered Merck Finck & Co, a member of KBL European Private Bankers. The statements and views expressed in this document are those of the author as of the date of this article and are subject to change. This article is also of a general nature and does not constitute legal, accounting, tax or investment advice.