Foreign Policy Blogs

Finding the Silver Bullet to Jump Start the EU’s Economy

 

Flickr' user mg-muscapix

via Flickr’ user mg-muscapix

While the U.S. is inching closer to pre-crisis unemployment and GDP growth figures, the picture across the pond is much, much darker. The Eurozone, once the darling of economists and businessmen everywhere, is unable to wiggle its way out of a quagmire of depressed investments, contracting exports, low employment and external shocks. The third-quarter growth figures, released on November 13, were underwhelming and fell beneath the expectations of analysts, further dispelling the hopeful notion that 2015 will be the year the Euro will boom. Instead of a predicted 0.4% growth, the 19 members of the currency bloc clocked in at 0.3% as Germany slowed, Portugal caved and Finland out-shrank even debt-laden Greece.

While a full, sector-by-sector breakdown of the economic contributions of every member state will be released in December, Barclays estimates that “domestic demand, and in particular private consumption, was once again the main contributor to GDP growth”. However, saying that consumption was responsible for keeping the Euro area in the green isn’t an epiphany—what is, however, is the extent to which exports slowed and imports rose. If historically net trade served as the engine of growth for the Euro economy as a whole (especially for export-dependent Germany), pundits, faced with a slump in emerging markets, anticipate consumption to become the dominant force in European growth. Indeed, consumption can be held responsible for the strong performance of the Euro area’s industrial production, which rose by 1.9% in the three months to September.

With unemployment refusing to budge downwards from its 11% summit, inflation barely registering at 0.1%, the onus is now on the ECB to accelerate its stimulus program ahead of a key meeting in December.

However, it’s not just global market trends that are responsible for the Eurozone’s flagging exports. In certain sectors, it is European policy itself that is to blame. Take the Small and Medium Enterprises (SME) sector, seen as the backbone of the European economy. Unlike their American counterparts, EU SMEs are ill-fitted to secure financing, partly because the EU lacks a capital markets union, but also because EU funds are slowly trickling down and not across all sectors. For example, even if the European start-up economy benefits from a talented pool of STEM graduates that surpasses the U.S.’, the lack of collaboration between tech hubs and dependency on outside funding has meant that almost no innovative products have come from Europe. While the U.S. raised financing totaling some $39 billion in the first three quarters of 2015, the EU lagged far behind with $7.43 billion. Venture capital is so fragmented and caught up in red tape that European startups have to turn to the U.S. to secure funding, leading a CEO to exclaim: “How come we can’t get funding right in Europe?”

And it’s not just access to financing: sometimes competing European interests collide, dealing blows to European competitiveness and growth. Even if more than 600,000 EU SMEs are part of the export ecosystem, generating over a third of EU exports and employing more than six million people throughout the continent, their capacity to grow has in some respects been curtailed by poorly tailored policies. According to industry sources, adapting to regulations is a topic of growing concern, consistently ranking in the three most pressing problems faced by SMEs across the European Union.

A vivid example concerns the lowly aluminum foil sector, where an over-eager trade policy has led to significant job losses that eventually put at risk the viability of the entire sector. The European Commission placed anti-dumping tariffs upon aluminum foil imported from China, Brazil and Armenia back in 2009, ostensibly in a bid to protect businesses in the EU from the typically unfair trade practice of selling goods or commodities at a rate far below the ordinary market value. A similar action is now on the table for Russian exports. But with 80% of the production costs for the European SMEs rewinding foil into supermarket rolls, cutting off the source of raw materials can only bode ill on the industry as a whole. In safeguarding this principle, thousands of workers spread across several dozen EU SMEs involved in the chopping down of the so-called “jumbo rolls” into the household items used in kitchens everywhere are now at risk of losing their jobs, posing a threat to the European aluminum rewinder industry as a whole.

Therefore, the European economy is sputtering not just because the Chinese economy is in for a rough landing, nor because of growing political uncertainties attributable to rising Eurosceptic feelings—that would be an over simplistic analysis of the structural risks underpinning the much-expected and twice delayed European recovery. The truth is that the European economy is getting harder and harder to manage and understand by Brussels. The sad cliché that makes EU specialists chuckle is still relevant—there is no such thing as a silver bullet that can restart EU growth, what is needed is a coordinated institutional response.