ECONOMIC PROSPECTS FOR EUROPE IN 2014

Europe’s  economy is going to expand very slowly. The European Central Bank (ECB) has stabilized sovereign debt  markets and systemic risk is for now substantially reduced. But growth will not follow early. Most of the south of Europe has nominal unit labor costs well above Germany’s post- reform levels, and the process of reconvergence with common exchange rate is slow and difficult. Reforms to increase structural flexibility and accelerate a structural shift toward the tradable sectors have been limited. The net result is that the structural rebalancing in Europe will take time and prospective growth will be low in and beyond 2014.

Europe is not out the woods yet, and the risk that the crisis could return is higher than is commonly understood.

Euro area growth is on track to reach only 1 percent in 2014. Continued bank deleveraging, an uncertain global growth outlook that will restrain exports, excessively tight macroeconomic policies and an incomplete framework for monetary union provide powerful headwinds to recovery. Stronger demand is needed to boost growth, and a relaxation of fiscal authority would be welcome in this regard. The European Central Bank (ECB) will also need to do more than spur new lending, particularly for small and medium enterprises, and consider full- scale quantitative easing.

The problem with this forecast is that growth at this level is insufficient to reduce high levels of unemployment, which has reached 26 percent in Spain and 12 percent for the euro area as a whole . Youth unemployment, which averages nearly 24 percent for the eurozone and exceeds 35 percent in several countries, represents a critical threat for Europe’s future.

Banking union will be the focus of policy efforts to advance monetary union in 2014.The ECB- led stress test, essential in efforts to restore confidence in Europe’s banks, will need to navigate a narrow path forward: too soft and the credibility of the ECB could be irrevocably damaged; too tough and the resultant financial stress could turn today’s green shouts brown in a hurry. Market pressures could return quickly if countries were seen to be abandoning their commitment to reform and financial gaps were to reemerge.

Perhaps the most serious challenge to Europe in 2014 is political. Polls show that austerity is undermining the readiness of Europeans to accept the deeper union that is needed to redress Europe’s economic woes. Parliamentary elections in May are likely to bring a strong anti- austerity vote. ( A euro-skeptic parliament could set back efforts to negotiate a transatlantic agreement. Governments in periphery countries such as Greece and Portugal may find it increasing hard to sustain support for their adjustment programmes.

The challenge therefore is to restore growth before  markets lose confidence in the reform process again. European leaders need to win back their publics and make a better case for a faster move to economic and political union. Failure to do so could make 2014 the year the crisis returns.

EU Member States Projected Growth Rates in 2014

1. Latvia: 4.196% (Euro-zone)
2. Lithuania: 3.267%
3. Estonia: 2.5% (Euro-Zone)
4. Luxembourg: 2.4% (Euro-Zone)
5. Bulgaria: 2.3%
6. Poland: 2.223%
7. Sweden: 2.212%
8. Slovakia: 2.0% (Euro-Zone)
9. Romania: 1.982%
10. Germany: 1.7% (Euro-Zone)
11. Ireland: 1.7% (Euro-Zone)
12. Austria: 1.646% (Euro-Zone)
13. Czech Republic: 1.632%
14. Slovenia: 1.6% (Euro-Zone)
15. United Kingdom: 1.539 %
16. Croatia: 1.5%
17. Malta: 1.4% (Euro-Zone)
18. Denmark: 1.344%
19. Finland: 1.3% (Euro-Zone)
20. Hungary: 1.186%
21. Belgium: 1% (Euro-Zone)
22. France: 0.7% (Euro-Zone)
23. Portugal: 0.7% (Euro-Zone)
24. Greece: 0.7% (Euro-Zone)
25. Spain: 0.7% (Euro-Zone)
26. Netherlands: 0.3% (Euro-Zone)
27. Italy: 0.2% (Euro-Zone)
28. Cyprus: (-3.9%) (Euro-Zone