Institute of East and West Studies • Yonsei University

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Article about economy wriiten by Kim Deuk-gap
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  • 2019-01-17 08:33:04

Forecast of declining exports and private consumption./ Kim Deuk-gap


The European Union (EU, with a total of 28 member countries) is the world's second-largest economy (21.6% in 2017). In addition, the Eurozone, which consists of 19 EU member countries that use the Euro, accounts for 15.8% of the world's gross domestic product (GDP). It is not overboard to claim that the EU or Eurozone economies represent the European economy. The European economic region experienced negative growth twice, in 2009 and 2012 respectively, due to fiscal crises following the global financial crisis. As a result of the global financial crisis, GDP reduced by 5.8% and subsequently by 1.7%.

As of the end of 2018, the European economy has continued to grow for 6 consecutive years. In the past decade, exports and domestic consumption have repeatedly served as the growth engine for the European economy to rebound. During the export-driven period (2010-2013), exports served as sustenance for the European economy, in lieu of domestic consumption. European exports increased by 53% during the period, due to heightened price competitiveness (currency exchange effect) and increase in global demand for European products as the Euro weakened. Thereafter, domestic consumption drove the economic growth. During the period drive by domestic consumption (2014-2017), the European Central Bank (ECB) prevented a slump and fiscal crisis via reduction of interest rate and, from 2015, utilized a non-traditional monetary policy, in order to overcome the financial crisis. As the ECB has implemented aggressive monetary easing (quantitative easing and ultra-low interest rates), the slow domestic economy has gradually begun to recover.

ECB’s policy of “Fiscal easing → → Increasing liquidity and reduction in market interest rate → → Increase in personal loans → → Increase in corporate investment and demand for housing → Increases employment rate as well as price of housing → increase in real disposable income leads to a rise in consumerism → Increase in capital expenditure/investment” starts a positive ripple effect cycle and spread the recovering overall trend of domestic consumption.  Consumer expenditure, which accounts for 54% of the entire GDP of the European economic zone, in comparison to 2013 levels, increased by 8% as of the end of 2018. Additionally, even though there are differences across the EU member countries, but unemployment levels, that once topped 12% within the European economic zone, have been constantly decreasing and as of October 2018, has dropped to 8.1%. At the same time, the European economy clocked a 2.4% growth in 2017 due to increases in exports as well as domestic demand improvements.


The European economy has been slowing down since peaking in the 3rd quarter of 2017. Throughout the 4th quarter of 2017, the quarterly growth rate (in comparison to the previous period) of the European region was recorded at 0.7%, and fell by 0.4% each in the 1st and 2nd quarters of 2018 and a further 0.2% in the 3rd quarter. In comparison to the same period last year, the reduction in growth rate of the European economic region is highly pronounced. In 2017, the growth rate was between 2.5% and 2.8% through the 2nd to 4th quarters, but it continued to slow down from 2.4% (first quarter) to 2.2% (second quarter), and to 1.7% (third quarter) in 2018. Exports and consumption expenditure which led the strong economic growth in 2017, are the reasons for the slowdown. Based on this trend, the growth rate of the European region is expected to be below 2 percent in 2018. In fact, forecasting agencies that have recently announced their forecasts have all downgraded their forecasts regarding the European economic growth.


There are several factors contributing to the slowing growth of the European economy. Firstly, as the European economic outlook turns better, increase in the output gap (actual growth minus potential growth) caused an increase in inflationary pressure and thus reduced economic sentiment/behavior. According to the analysis done by the EU executive committee, following the global financial and economic crisis, the economic fundamentals of the European economic zone had weakened and the potential growth rate of 1.4% in 2017 is below pre-crisis level (1.8%). Further, deteriorating trade conditions due to the increased trade friction between the U.S. and China etc. are negatively affecting the international economy, with concerns over slowing global demand, a rise in interest rates in the U.S., and an increase in international oil prices. 


Internally, the reduction in real disposable income due to rising consumer prices, increase in market interest rates due to uncertainty in bond markets, and uncertainty regarding Brexit (the United Kingdom's withdrawal from the EU) are contributing to the slow growth of the domestic economy. The European Central Bank’s various estimates, such as the European Commission Sentiment Indicator (ESI) and Purchasing Managers’ Index (PMI), show a downward trend from early 2018, signaling a slowdown in the European economy. Looking at the actual retail sales in the European region, despite increasing by an average of 2.3 percent in 2017, yet in comparison to the same period last year, growth stood at 1.5 percent from January to September 2018.



Both domestic and external conditions are expected to worsen in 2019. Therefore, as the European economy has been slowing down recently, it is unlikely that it will regain its growth rate. Given the slowing economy, the growth rate of the European economic region is expected to be between 1.6% and 1.8% in 2019, down by 0.2 to 0.3 percentage points from 2018. The basis for such a pessimistic outlook is as follows: firstly, the ECB’s monetary policy, which had served as the primer/catalyst within the domestic economy, is highly likely to be tightened in 2019. At the monetary policy meeting held in December 2018, the ECB decided to freeze the benchmark interest rate, which is currently 0%, and to end the economic booster asset purchase program by the end of 2018. Additionally, the ECB also lowered its economic growth forecast for the European economic region from its initial forecast of 2.0% in September 2018 to 1.9%, and lowered its growth forecast for next year from 1.8% to 1.7%.

Regarding the ECB's fiscal easing policy, although there have been arguments for and against it thus far, but it is hard to deny that there was a positive effect of the policy on the recovery of the economy after the economic crisis, through the provision of liquidity. Through fiscal easing, as of the end of October 2018, the amount of bonds the ECB has bought so far amounts to about 2.55 trillion Euros (22.7 percent of the European economic zone’s GDP). The ECB started the bond purchase program since March 2015 and has been gradually decreasing the amount of bond purchased since 2017, where bond purchases once amounted to €800 billion per month have since been reduced to €15 billion per month from October 2018. Despite concerns that Italy's national bond interest rates may increase, the ECB plans to stop purchasing the bonds altogether by the end of 2018.

However, the ECB plans to maintain the current level of policy interest rate (the benchmark interest rate of 0%) until the summer of 2019. This means that ECB intends to start increasing interest rates after the 3rd quarter of 2019. Market outlook predicts that interest rate increase will occur in October 2019. Even if there is an interest rate hike, it is likely that the ECB moves to gradually raise the interest rate. Such policy of extremely low interest rate is expected to play a role in preventing an acute slowdown in the European economy in 2019. Also, the labour market boom is expected to continue for some time, and in turn, is expected to positively affect consumer expenditure. The unemployment rate in the European economic region in 2019 will not be able to meet pre-crisis level (of 7.3% in January 2008), but it is expected to fall to the mid-7% level.


The problem lies with exports. Due to deteriorating external conditions, Europe's export growth is showing signs of slowdown. The greatest downside risk factor affecting the European economy in 2019 is the possibility of a worsening trade war. While, many countries around the world are attempting to prevent the proliferation of trade protectionism, the trade war between the US and China has strong characteristics of a fight for dominance between a world supreme economy and the challenger country, and thus, it will be difficult to arrive at a solution that deals with the root of the problem. The International Monetary Fund (IMF) estimates that, in the event that, measures that have already been announced or considered, and measures that have not yet been implemented (such as a 25-percent tariff on motor and auto parts, retaliatory measures, etc.), are all implemented, global GDP will decrease by more than 0.8% in 2020 and in the long term, shrink about 0.4%.

In the event of financial instability in emerging economies due to the spread of trade protectionism and the U.S. interest rate hike, the European economy, which is heavily dependent on exports, will inevitably suffer. Exports of goods and services account for 27.9% of GDP in the European economic region. This figure is substantially greater than the U.S. (12.1 percent), China (19.6 percent), and Japan (18.0 percent). This shows that the European economy is much more dependent on external trade/foreign countries as compared to its competitors. Additionally, trading companies in the European economic region also have to overcome the late after-effects of the Euro strengthening program (5% increase based on the actual effective exchange rate) that was conducted between January and August 2017. Should unfavorable external conditions be realized at the same time, it is feared that European countries, including Germany, will suffer tremendously in terms of their exports.

In 2019, it is necessary to place the focus on the UK and Italy. This comes as each country can be a factor that can possibly amplify the slowdown in the European economy. There is a possibility that the uncertainty circling Brexit and the worsening fiscal status of Italy can add on to the downside risk for the European economy in 2019. The UK, which is scheduled to leave the EU on 29 March 2019, needs to ratify Brexit in agreement with the EU in order to minimize the impact on the economy. The agreement includes various key matters directly related to UK’s national interest, such as Northern Ireland’s national border issue, the extension of the transition period, future relations, the application of EU law, financial services etc. If political uncertainty regarding Brexit continues to deepen, the instability of the British financial market, which is a given, as well as concerns regarding “No Deal” on Brexit, will be sources of instability in the European economy.

On the other hand, the extreme-rightist Italian government, which advocates populism, and the EU are in disagreement over 2019 fiscal policies such as budgeting. Experts purport that Italy's fiscal issues are less likely to cause market instability.

However, as pointed out earlier, if the growth of the European economy slows down fully, it is likely that the Italian economy, which is suffering from structural weakness, will fall back into recession. In this case, due to the instability of the market, the sustainability issue of Italian government debt, which accounts for 113% of GDP, cannot be ruled out. In conclusion, it is expected that there will be severe impacts in terms of both internal and external aspects for the European economy in 2019. It seems unlikely that the European economy will be able to overcome difficulties and rebound, considering it is highly dependent on foreign countries.

A poll found that, if British voters were to vote on Brexit again, 6 out of 10 will choose to remain in the European Union. In June 2016, 51.9% of the UK voted in favor (48.1% against) of Brexit. This is the survey result from the survey performed by British social research agency “NatCen”. 


The term "RegrExit", which reflects social sentiments of regretting Brexit, is spreading like a buzzword and there are calls for a revote. This because of the concern that Britain could be isolated amidst a rapidly and increasingly globalized world. On 25 November 2018, EU members held a special summit in Brussels, Belgium and signed an agreement on Brexit. According to the agreement, Britain is to leave the EU on 29 March 2019, but during the transitional period up until 31 December 2020, Britain is required to comply with EU law. Until the end of the transitional period, the EU and the UK are to do their best to ratify and conclude the agreement regulates future relations and, if an agreement cannot be reached, the transitional period may be extended once, to last up to 1 July 2020. A vote on such Brexit agreement was originally scheduled to take place in December 2018, but British Prime Minister Theresa May announced that the vote was to be postponed until mid-January 2019.

With the agreement vote postponed, it is expected the situation will become increasingly chaotic due to the rejection. Some expect that the UK may delay or reverse the Brexit decision based on the European Court of Justice (ECJ)’s interpretation. However, the British government expressed their stance that it does not consider reversing the Brexit decision at all. There are also increasing numbers of the opinion that if negotiations regarding post-Brexit fall through and there is no agreement between the UK and the EU, the UK leaves the EU with a zero-preparation "No Deal Brexit" in March 2019. In addition, Brexit is expected to have a negative impact on the outlook of the British economy, with a gloomy forecast of reducing GDP by 2%. In a report released in November 2018 by the British National Institute of Economic and Social Research (NIESR), it purports that there is a possibility that national income will decrease due to the reduction in trade volume, foreign investment, production etc. as a result of Brexit.


There was a growing sense of crisis that other European countries will follow in the footsteps of the UK in leaving EU when Brexit was first discussed in 2016. Starting with Slovakia, which called for a referendum to withdraw from the EU when the far-right party took over, followed by Netherland, Denmark, France, the Czech Republic etc. were countries that were highly likely to withdraw from the EU. Although there were differences between the perspectives held by each country, the EU was increasingly blamed for the sluggish European economy and immigration policy issues. However, after witnessing the UK’s crisis while attempting to leave the EU, it is highly unlikely that the other EU countries will attempt to leave the EU.

Belgium’s think-tank, Brugel, explained that the possibility of ItalyExit is unlikely, as, in the next election, politicians seeking political power are not aiming to have Italy’s debt crisis pile up. Greece is in the same situation. With large amounts of debts at stake and having borrowed enormous sums from the EU, Greece is barely surviving, and thus regardless of public opinion, it has no choice but to remain in the EU. The Netherlands, which was the most likely country to leave the EU, has since toned down. In a survey conducted right before Brexit, 61% of the French reacted negatively to the EU, but after President Emmanuel Macron was elected, the extreme-rightist party's push for the "Frexit (France's withdrawal from the EU)" lost steam. As such, the possibility of European countries following suit on Brexit, which will take effect on 29 March 2019, looks unlikely. However, it seems clear that all of Europe is questioning the effects of integrating the entire European region.


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