EU growth in 2015 to be again sluggish; Can the Juncker Commission fight this out?

It was last Tuesday when the European Commission (EC) met in Brussels to talk about the 2014 autumn economic forecast. Among others, the discussion was mainly about the sluggish growth and inflation, the impact of geopolitical crises in the EU economy as well as the significant economic performance of Ireland. Wrong growth forecasts The EC stated that the EU’s growth rate will be 0.8 percent this year, deviating by 0.4 percent (1.2%) compared to May’s forecast. Also, the annual GDP growth forecast for 2014 is decreased to 1.3 percent. More specifically, a narrow-down analysis in a country level demonstrates that GDP evolution in Italy, Croatia and Finland will be negative. France, the second biggest EU economy is about to grow at a very low pace (0.3%) whereas Germany, the Netherlands and Spain will grow at a significant level. United Kingdom and Poland will be among the countries that greatly contribute in GDP growth terms reaching 3.1% and 3.0%, respectively. According to the EC’s officials, those differences are due to country-specific factors which are pushing down the growth rate in Europe. The vice president of the EC, Jyrki Katainen who is responsible for Jobs, Growth, Investment and Competitiveness stated: “Such factors include the deep-seated structural problems that were already well-known before the crisis, the public and private debt overhang; ongoing financial fragmentation related to the sovereign debt crisis.” Geopolitical crises and growth Another issue that the EU has to take into consideration is the geopolitical crises in Ukraine and the Middle East. The European Commissioner for Economic and Financial Affairs Pierre Moscovici mentioned that there are still several risks for EU growth because of the geopolitical tensions. If further sanctions are to be imposed by the U.S. and EU to Russia and vice versa then the EC’s growth forecasts will not be materialized; thus causing a negative impact on domestic demand through bad EU confidence. Ireland: a top growth performer Ireland is predicted by the EC to be the country with the fastest growth pace, reaching 4.6 percent in 2014. In particular, Jyrki Katainen mentioned that Ireland is “coming back” by implementing all the necessary measures in order to provide confidence to private investors who will create more jobs and increase growth prospects. Furthermore, the GDP growth rate will be 3.6 percent in 2015, a 0.6 percent increase compared to the last forecast six months ago. All in all, these facts support the view that Ireland is one of the most promising markets of the EU. Thinking about the horrible crisis that this country has suffered, this is truly unexpectedly pleasant. Low inflation persists The inflation outlook is expected to reach approximately 0.5 percent in 2014, 0.8 percent in 2015 and 1.5 percent in 2016. The very low inflation regarded this year is because of the downslope of the oil prices, the bad economic environment and euro’s appreciation. These events are going to continue till the end of the year but the EC’s officials claim that this trend will eventually alter in the next few years forcing inflation to increase due to euro depreciation, improvement of the economic environment and lower impact that the changes of the commodity prices would have on inflation. However, we should be a bit skeptical because the EU forecasts have been refuted in the past. Therefore, we have to wait and see if the commodity prices will not greatly affect inflation and whether the EU economic outlook will ameliorate in the next years. How to deal with growth? The euro area economy will grow by 1.1 percent next year. This is way below (1.7%) the previous predictions. Apart from structural reforms, investment is required. One solution that is proposed by the EC and will help in this direction is Junker’s investment programme of 300 billion euros. Even though it seems that it will have a significant effect on the EU economy, I would not not rush to hasty conclusions at this moment but wait till the end of the year, when further details will be announced, in order to judge it more properly.