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Outlook For Euro Area Growth

* January 9, 2017

The European economy grew at an above-trend pace in 2016 and should do the same in 2017.



Euro area growth should remain reasonably strong in 2017, as telegraphed by a number of leading economic indicators. Fiscal austerity has been shelved in favor of modest stimulus. The European Commission is now even advising member countries to loosen fiscal policy more than they themselves are targeting.

Ongoing efforts to strengthen the euro area’s banking system will also help. As banking stresses recede, the gap in economic performance between northern and southern Europe should narrow. The overall stance of monetary policy will facilitate this trend. If the ECB keeps interest rates near zero for the foreseeable future, as it almost certainly will, Germany’s economy will overheat. Higher wage inflation in Germany will give a competitive advantage to Club Med producers seeking to sell their goods in the euro area’s biggest economy and will help erode Germany’s current account surplus.

Bottom Line: Stronger euro area growth rests on the assumption that Germany accepts an overheated economy. This will clash with Germany’s historical antipathy towards inflation, meaning that political risk could escalate over the coming years.

https://blog.bcaresearch.com/outlook-for-euro-area-growth

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