Insights & Advice


An Eye on Europe: From Winter to Spring

Thursday, April 10, 2014

  • A global economic upturn is expected by year’s end and a return to trend growth by 2015, including in Europe.
  • More relaxed fiscal policies are supporting recovery in Europe (A bank resolution will relieve Europe’s national governments of sole responsibility to rescue or unwind troubled institutions, allowing for continued fiscal relaxation).
  • Severe joblessness has depressed European wages, creating an environment conducive to deflation and allowing for continued monetary tailwinds.
  • Depreciating currencies and stimulus programs should lift emerging economies, which will benefit Europe’s export growth.


Odds are improving for a broader global economic upturn by year’s end and a return to trend growth by 2015. The recovery is firming across Europe, with the exception of Greece, where further debt restructuring appears likely. The automobile industry, the largest pan-European employer, is expanding and hiring. Slumping emerging markets hit bottom late last year and forward-looking indicators as well as policy measures promise better performance ahead.

Europe turns around

The Eurozone expanded 0.275% in the fourth quarter of 2013, or 1.1% annualized, in large part due to solid growth in the formerly struggling economies of Germany, Netherlands, France and Spain. The currency union has expanded for three consecutive quarters, after declining from the fourth quarter of 2011 to the first quarter of 2013. (The 28-member European Union expanded 0.425% in the fourth quarter of 2013, or 1.7% annualized, in the fourth quarter.)


More relaxed fiscal policies in Europe are supporting recovery. Yet the region will be vulnerable to external shocks as long as growth is mainly driven by exports, with a lesser contribution from domestic demand. Domestic consumption will not pick up unless the unemployment rate falls below levels that have prevailed over the past year: 12% in the EU as a whole, and 27.5% in Greece, 25.8% in Spain, and 15.3% in Portugal. Severe joblessness has kept wages depressed across the Eurozone, creating an environment conducive to deflation.

EU banking union moves forward

The European Parliament and the region’s governments agreed in March on a crucial requirement for a banking union: a single mechanism to resolve troubled large banks. If implemented, the plan would free national governments from having the sole responsibility to rescue or unwind insolvent domestic banks.

The mechanism will involve the European Central Bank—the Continent’s top banking supervisor as of next year—and a newly created resolution board composed of officials from a range of European institutions. When the ECB declares a bank in distress, the resolution board will assess whether the institution poses a threat to the financial system and determine if a private sector solution exists.  If the bank is considered a systemic threat and no private sector solution is found, the board can wind it down using a resolution fund, financed by contributions from banks in all European Union member countries.

The board will act quickly, likely over weekends to preclude bank runs and reassure markets. Government finance ministers will retain the power to review the board’s decisions, subject to certain conditions. The agreement will go before the European Parliament for approval this month.

The proposed resolution for European banks shifts the cost of backstopping the financial system from governments to banks. Taxpayers will no longer be required to bail out troubled financial institutions to prevent a major financial and economic crisis.

(Yet disappointingly, the agreement does not provide a common safety net for Eurozone bank depositors. Deposit insurance will remain a national responsibility, encouraging large depositors in weak economies to move their funds to stronger jurisdictions at the first sign of a crisis. This, in turn, will exacerbate cyclical downturns by lessening the amount banks can lend at critical moments.)

Upbeat signals from emerging markets

After a weak 2013, growth rates stabilized in emerging markets more recently. Currencies have stopped falling and exports have revived. External balances have improved, foreign capital has returned, and equity prices have risen.  All supporting export potential for European corporations.

Bottom Line:  The global economy is expected to gain traction through the rest of 2014. The Eurozone’s recovery, while still weak, is slowly gaining strength. However, while any growth is good, moderation from weak growth to stagnant domestic demand would make the upturn vulnerable to external shocks.  Central and Eastern European countries are riding the tail of the Eurozone’s business cycle. The U.S. and Canada are shaking off the effects of a harsh winter, and their economies are gathering pace and allowing for greater exports from Europe. Inflation pressures in emerging markets are subsiding, opening the way for expansionary policy initiatives in weaker economies, also allowing for European growth tailwinds.