The outlook for Europe's economy is grim

At the turn of the century, Europe's economy was bigger than America's. Since 2008, the year of the financial crisis, when the European Union and the United States were comparable in GDP size, the gap has been widening, with the eurozone economy growing by only 6 percent, compared with 82 percent for the United States. For the past decade or so, while the rest of the world outside Europe has been booming, the European economy has stagnated. The US economy is now $8.6tn bigger than the EU in terms of GDP; In terms of GDP per capita, the US economy is more than twice the size of the EU. As the population of many EU countries is shrinking, the fertility rate is generally lower than that of the United States, and the impact of their per capita GDP lagging behind that of the United States is increasing, and the economic gap between Europe and the United States will continue to widen.

Recently, the European Commission also released a report, reducing the economic growth forecast for the EU and the euro area in 2024 from 1.4% and 1.3% to 1.3% and 1.2%, respectively. The EU lowered its economic growth forecast mainly based on high inflation, high interest rates and weak external demand. The combination of these factors makes the prospects for economic growth in Europe not optimistic.

With the impact of the new coronavirus epidemic and the Russia-Ukraine conflict lasting nearly two years, the European manufacturing industry is worse, energy security is quite affected, energy policies are riddled with holes, enterprises are moving out of Europe has become a major trend, traditional industrial advantages are suffering from strong international competition, or even the prospect of some industries is particularly bleak, forced to turn to trade protection policies. Today, the geopolitical situation is still unclear, and various pressures have not reduced the downward pressure on the European economy.

First, eurozone inflation remains high. Eurozone inflation stood at an annual rate of 2.8 per cent in January, down from 2.9 per cent in December, according to preliminary figures released today by Eurostat, the European Union's statistical office. Core inflation, which strips out energy, food and alcohol and tobacco prices, was 3.3 per cent that month. Euro zone core inflation remained slightly above market expectations in January.

Second, higher interest rates resulting from higher interest rates have tightened lending conditions for European banks, especially in the real estate and construction sectors. Monthly mortgage payments have also risen sharply as a result of the rate hike, with the latest mortgage interest rates even increasing by more than 60%. The debt pressure caused by high interest rates and lower investment have increased the risk of a "hard landing" for the European economy in the short term.

Third, the world economic recovery is weak, the external market demand is weak, and European exports continue to shrink. In the third quarter of 2023, the volume of EU imports and exports fell by 4.6% and 1.2%, respectively, and the total EU exports fell for three consecutive quarters. In addition, the EU faces a number of structural challenges, including slow productivity growth, the urgent need to accelerate green and digital transformation, and an aging population. Only by effectively addressing these challenges can the EU remain more sustainable and competitive.

In response to the current economic pressures, the EU has taken a number of measures. European countries, for example, support businesses through tax cuts, loans, subsidies and other fiscal measures. Especially since the Ukraine crisis, the eurozone has adopted a series of discretionary fiscal and monetary policies to control the rise in energy and food prices in an effort to strike a balance between containing inflation and avoiding a recession. At the same time, the European Central Bank provides preferential financing conditions, bond purchases and other monetary policy measures to stimulate economic growth and maintain financial stability. At this stage, in order to reduce the public deficit, the EU is phasing out support measures related to the pandemic and energy.

It is worth noting that the current European labor market is relatively stable and strong, and consumption is slowly recovering, which is an important basis for the European economy to achieve moderate growth in 2024. However, in the long run, the key for the European economy to get out of the predicament is to advance structural reform, promote green transformation and the development of the digital economy, and improve the competitiveness of emerging industries. As European Central Bank President Christine Lagarde said recently, the EU needs to push ahead with new fiscal rules and make faster progress on structural reforms to boost regional competitiveness.