Clouds gather over global economy, casting long shadow on Europe
EU’s big beasts haven’t addressed their biggest challenges.
PARIS — Rarely has the global economy seen a starker contrast, between a present looking so bright and a future so gloomy.
The International Monetary Fund’s latest assessment of the world economy predicts the global recovery will accelerate yet again … for this year. After that, the storm clouds are expected to start rolling in.
The world’s finance ministers gathering this week in Washington might prefer to focus on the positive. But once the self-congratulatory TV interviews are over and they’re looking further down the line, the powers-that-be at the Group of 20 meeting of finance ministers and central bankers will realize that things are too good to last. And as they contemplate the many looming crises, the Europeans have reasons to worry most.
An all-out trade war has never been likelier after U.S. President Donald Trump slapped tariffs on China’s steel. The Middle East is threatening to flare up again because of the Syrian war and the possible U.S. withdrawal from the Iranian nuclear agreement. Russia is gradually decoupling from the global economy due to the Western sanctions triggered by Vladimir Putin’s policies.
IMF Managing Director Christine Lagarde warned from Hong Kong that the multilateral trade system built since World War II was “in danger of being torn apart.”
Meanwhile, Europe, which faces the amputation of Brexit, remains fragile but hasn’t drawn all the lessons from the euro crisis.
In this gloomy geopolitical context, governments and economists will be forced to remember that the current recovery rests on shaky financial foundations. Public and private debt is as high as ever. And the day of reckoning when central bankers must unwind their massive money-printing programs is near — indeed, it has already started in the U.S.
IMF reports are both a display of economic expertise (although the institution’s forecasts aren’t always right) and an exercise in high-flying diplomacy. But you don’t need to read far beyond the celebration of the recovery in the opening lines of the just-released World Economic Outlook to get a good idea about where the dangers are lurking.
Growth will accelerate this year, just as it did in 2017. The world’s gross domestic product is expected to increase by 3.9 percent in 2018, versus 3.8 percent last year, the IMF said. Growth in recent years has been both coordinated on a global scale — as rarely seen before — and also sound, inasmuch as it has been based on a pickup in investment. And the recovery will remain brisk in the next few months.
But “beyond the next few quarters, risks … are skewed to the downside,” the IMF said. It listed financial vulnerabilities, “an erosion of support for global economic integration” (translation: rising protectionism and possible trade wars), and “a host of non-economic risks” such as “geopolitical strains, political discord, and climate shocks.”
Europe, in this sobering context, is not in the best place. Its growth, albeit strong by recent standards, is weaker than in the rest of the world: real GDP in 2018 is expected to increase by 2.5 percent in the EU compared to 2.9 percent in the U.S. and 4.9 percent in emerging markets and developing economies.
The Continent is also vulnerable because it could become the collateral victim of trade wars it wasn’t a party to, should measures and counter-measures between China and the U.S. badly shake world business confidence.
Last week, IMF Managing Director Christine Lagarde warned from Hong Kong that the multilateral trade system built since World War II was “in danger of being torn apart.”
Lagarde was just joining the chorus of Europeans who have issued similar warnings in recent weeks. “There are no winners in trade wars, just different degrees of losers,” Benoît Cœuré, a member of the European Central Bank’s executive board, said earlier this month.
Late on reforms
But the main source of Europe’s vulnerability is that it is both late on reforms and deprived of the tools that might help if it faces a severe economic downturn.
To fight the next slump, it won’t be able to rely on monetary policy. The ECB has given much of what it could in the form of easy money, which it’s in the process of phasing out. Yet some of the EU’s largest economies still remain too indebted to be able to rely on fiscal stimulus if or when the need arises.
This inability of the EU, and its eurozone core, to reform while the going is good is the big self-inflicted danger hanging over the recovery, insisted a European Commission official.
“We’re still waiting for France’s public spending overhaul, we’re still waiting for Italy to get its act together, we’re still waiting for Germany to realize that it must do more to reform its own economy, and European governments behave as if they had all the time on their hands to keep debating whether or not to call their bailout fund a ‘monetary’ fund,’” the official said.
Likewise, a French government official said he was growing more pessimistic by the day. If finance ministers keep rejoicing while leaving the worrying to academics and experts, “the next time [the eurozone is] in a funk, we’ll have to improvise once more — we’ve forgotten everything and learned nothing,” he said.
“When the economy starts burning, it will be too late to regret the fiddling.”