Elysia Rezki

Junior Legal Associate, PKF

Elyisa Rezki is a Junior Legal Associate at PKF.

Is Europe expecting a slow down next year?

Tuesday 03rd December 2019

Europe‘s prognosis for 2020 is set to face a cautious recession. Dire slowdowns of major European economies and heavy reliance upon austerity policy instruments post-2008 crisis have ultimately borne unsuccessful results -all point to a slow-down for the region. Even more troubling is a forecast from Moody’s and French president Macron – both predicting that the next recession will hit Europe even harder than the financial crisis one decade ago. Why is this?

The deep social and economic damage caused by the last financial crisis still scar the continent. A decade of austerity, fiscal conservatism, low interest-rates and weak investment have perhaps made this looming threat rather predictable. Despite a buoyant stock market, promising unemployment rates and relatively strong quarterly growth figures since mid-2017, growth is arguably a regrettable result of a number of one-off tax cuts, unsustainable deficits and a significant build-up of private debt especially in the corporate sector. Optimism over low unemployment figures can moreover be offset by an increasingly insecure job market characteristic of the challenging digital 4th industrial revolution.

The biggest cause for concern nonetheless comes from Europe’s key powerhouse. Germany’s economy has become chronically lethargic – thanks to its diminishing manufacturing sector which report weak global exports. At the same time, Italy has already endured a technical recession in the second half of 2018 and has faced continual economic strain since as a result of political instability, weak productivity and significant debt. Across the Channel in the EU’s second largest economy, the United Kingdom of course continues to endure a seemingly never-ending level of uncertainty surrounding Brexit, causing the economy to shrink for the first time since 2012. An actualisation of a ‘no-deal’ Brexit will surely tip the country into an unwelcome recession.

Another concerning detail comes from the above-mentioned Moody’s outlook on Europe 2020. The agency warns that the proportion of B-3 rates companies (and therefore graded as ‘speculative’) has doubled over the last 3 years in Europe. This is in fact, a deterioration of a much larger scale than seen in the last financial crisis of a decade ago.

The imminence of Europe’s slow-down is demonstrated by the recent decision by the European Central Bank to cut rates on deposits. Rates have been cut for the first time since 2016, placing it at a record-low of 0.5%. This implies a negative interest rate, meaning banks will have to pay 0.5% for holding excess reserves. The decision, intended to encourage greater lending, is part of a wider stimulus package to attempt to counter the continent’s chronically low inflation and anaemic growth, and includes a return of a million-euro bond-buying programme (quantitative easing -Q. E).

Despite all of the warning signs, the decision for Q.E by the European Central Bank has received critical response by many governments – and not only by the exceedingly vocal US President. Some European financial chiefs have even gone so far as to criticise the package, saying it is going too far. Despite most experts in the field warning of the contrary, German’s Finance Minister Olaf Scholz recently proclaimed that there was no recession gloom; that Germany would indeed grow faster next year; and that there was no need for fresh stimulus measures.

However, with little sign of a fresh investment boom, talk of a new growth trajectory appear to be little more than wishful thinking. On the contrary, international trade tensions and geopolitical disputes are overwhelming the global economy to breaking point. Unstable growth is set to persist as European nations struggle to handle debt despondency and financial retrenchment.

What will this mean for Europe? A new recession is sure to bring about an abundance of renewed social and economic stress to the continent. The 2008 financial crisis offered up fertile ground to populist groups across Europe who have flourished as a result of the resulting euro weakness and the burgeoning immigration crisis. With the incomes of the working and middle classes continuing to squeeze; government spending cut; and small businesses struggling to take-off – demand is unlikely to pick up without a serious stimulus. Fears of igniting a downward cycle of job losses, lower wages, declining profits and decreasing levels of spending present a despairing prospect for Europeans – especially in a continent still ideologically divided and barely recouped from the pangs of the 2008 crisis.

The question follows what is needed to avert, or at least mitigate these unwelcome trends in Europe? An ideal solution will be to kindle a coordinated push on sustainable government investment both directly through the public sector and by encouraging private investment in productive and sustainable economic activities. Governments must be proactive to stimulate demand. This may succeed if serious measures are seen to activate a trickle -down economy, improve gender inequality, secure stable job creation by expanding social insurance net and adopting more progressive fiscal policies. Europe will need to actualise real, structured and potent efforts if it is to avoid the calamitous effects of a creeping economic slowdown.