How to build on Europe’s economic recovery
After years of crisis management, heightened self-doubt and even existential threats, Europe is in a much better place. Economic growth is picking up, political uncertainty has diminished, and despite — if not partially because of — Brexit, the vision of an “ever-closer” regional union is energising some new constructive thinking in core countries. Translating this into sustainable prosperity, however, is far from automatic, and that pivot will be problematic without progress in four key areas.
The latest set of robust high-frequency numbers shows that Europe's economy is growing at a much healthier 2 per cent to 2.5 per cent annual pace, with many more of its member states sharing in the growing expansion. Although youth joblessness remains an acute problem in several economies, the overall unemployment rate is coming down.
And, with ample liquidity, European financial markets have been performing well, both in absolute terms and relative to others.
The endogenous economic and financial healing is opening the way for reducing the prolonged reliance on the unconventional monetary policy measures being implemented by the European Central Bank.
The ECB can start thinking seriously about an exit plan for both negative interest rates and its programme of large-scale purchases of securities, although it will be very gradual, which will also help to reduce a high risk of greater political challenge to its institutional independence. France and Germany have had their key elections, and there is now hope for a constructive regional political runway anchored by a strengthened collective vision and co-ordinated action by the two countries.
Even though German Chancellor Angela Merkel encountered some domestic political turbulence over the weekend, the relationship between her and President Emmanuel Macron of France combines new energy with deep experience and credibility, raising hopes for progress on some long-delayed elements of the European project.
The internal push for reforms is amplified by several pressure points.
Britain's vote in favour of Brexit has provided an impulse for greater co-ordination among the other 27 members of the European Union. Since the highly uncertain days immediately after the referendum, the remaining countries of the union have developed, rightly, much greater confidence in their ability to move forward without Britain, especially now that the economic performance gap has swung against Britain and is widening.
Brexit has amplified other external pressures on the effective functioning of the EU. These include the common challenge of migration, Russia's annexation of Crimea, uncertainties about common defence, and grumblings by some of the eastern members.
All of this places the historical European project in a different place, and not just in terms of the situation on the ground. A reactive crisis management and prevention mindset is giving way to a more confident proactive and strategic one that seeks to achieve common prosperity.
Yet this change remains tentative and, critically, still needs to develop deeper structural roots. This will not happen unless there is progress in four key areas. (Contrary to what many would have you believe, these do not include the rapid conclusion of Brexit negotiations. Indeed, the EU has started to move beyond this issue that dominates politics in Britain and diverts attention from other serious challenges.)
The four areas are:
• Strengthening engines of growth by combining long-delayed structural reforms in individual countries with a renewed emphasis on completing regional economic and financial integration — that is, adding a complete banking union and better fiscal integration to the monetary union.
• Building a more collaborative working relationship between Germany and France once a governing coalition is formed in Germany. This would be characterised by adding to Germany's regional leadership ability a greater willingness to act. France, which has a much greater willingness to act but less ability, would enhance its stature with more concerted efforts at getting its economic house in order.
• Resolving separatist challenges that, over the longer term, are more serious for both the eurozone and the EU than Brexit. These involve countries such as Spain that have bought into the vision of the ever-closer economic, political and social union, as opposed to Britain's overriding emphasis just on free trade. This should start with commonsense EU mediation support on Catalonia.
• Developing more concrete collective responses to outstanding challenges that can only be addressed in a co-operative fashion. Eurobonds and debt relief for Greece lead the list of protracted issues, yet it may be more promising — at least tactically — to start with a better common response to the more recent questions presented by technology, including a more visionary approach to taxation, regulation and assessing the broader structural implications.
Such a combination of bottom-up and top-down measures would increase Europe's resilience and agility, paving the way for the type of inclusive economic and financial gains that improve not just actual performance but also potential prosperity. Without these measures, Europe's recent economic gains could turn out to be a cyclical blip rather than the durable foundation for the better future that remains a legitimate and attainable aspiration for the region's citizens.
• Mohamed El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as chief executive and joint chief investment officer. He was chairman of the president's Global Development Council, CEO and president of Harvard Management Company, managing director at Salomon Smith Barney and deputy director of the International Monetary Fund. His books include The Only Game in Town and When Markets Collide