Europe’s Economy a Weak Link in Global Expansion

Europe’s economy is looking like the weak link in the global expansion after a slowdown in the first quarter.

The Organization for Economic Cooperation and Development said on Monday that its composite leading indicators show “signs of easing growth momentum” in the eurozone as a whole and its three biggest economies—Germany, France and Italy, Bloomberg reported.

In comparison, the 35-member OECD area and the US show “stable” growth and China’s index points to “tentative signs” of the economy gaining speed.

The figures come amid a debate over whether Europe’s slowdown at the start of the year was temporary and due to snow and storm disruption or will prove more persistent. First-quarter GDP data for Germany will be published on Tuesday, along with a second estimate for the eurozone as a whole.

European Central Bank officials aren’t yet expressing worries about the economic outlook. Bank of France Governor Francois Villeroy de Galhau told Bloomberg Television on Monday that while the expansion isn’t accelerating from 2017’s best-in-a-decade pace, it “remains at a very solid level with broad based growth.”

ECB policymakers are citing concerns of possible disruptions in foreign trade as hampering investor and manufacturer confidence, but the challenges to the 19-member bloc's GDP expansion could be structural as well.

Quarter-on-quarter growth slowed to 0.4% in 1Q18, according to Eurostat, down from 0.7% expansion in 4Q17. This is the weakest pace of eurozone GDP growth since mid-2016 when the UK voted to separate from the European Union.

The single currency area's annual growth slowed to 2.5% in Q1 from 2.8% the previous quarter, but there is a widespread worry that the slowdown could continue into the subsequent quarters.

Meanwhile, the Italian coalition taking shape 10 weeks after March’s inconclusive election has made economic promises that seem incompatible with Europe’s fiscal rules and will be hard, if not impossible, to keep.

These include slashing taxes for companies and individuals, boosting welfare provision, cancelling a scheduled increase in sales tax and dismantling a 2011 pension reform which sharply raised the retirement age, Reuters reported.

France at the Crossroads

France has long been considered the weakest of Europe’s big three economies, Europe’s black sheep. Particularly when compared to the neighboring economic powerhouse which is Germany, France’s economy has suffered years of anemic growth, budget deficits, high unemployment, and income inequality.

Many doubted that France could ever truly recover from the 2007-2008 financial crisis. France’s economy has for years been so mismanaged and over-regulated that it has been widely seen as near impossible to accomplish anything within its industry.

Yet, in the past year, it appears that France is at long last moving in the right direction.

In just one year, the French economy has seen a remarkable recovery. The unemployment rate, which peaked in 2015 at 10.5% is now down to 8.9%, with the European Union average index standing at 7.3%. These recent developments have largely been attributed to one man and his economic policies. French President Emmanuel Macron appears to have put France back on the right path.

In the past year, Macron has taken the world by storm. Even German Chancellor Angela Merkel seems to be smitten by him and his politics. Reforming France is certainly not easy, yet the French president appears to have both the charisma and luck needed to influence and instill courage in French businesses and households alike.

Data Localization

The EU is about to decide how to push back against forced data localization measures that European firms are increasingly facing when doing business abroad.  Unfortunately, its proposed trade provision risks justifying more data localization measures around the world—unless national trade ministers demand more ambition, Project-disco.org reported.

European exports and jobs are increasingly harmed by the rise of forced data localization measures around the world.  As the world’s main exporter of manufactured goods and services, and as an emerging leader in connected cars and the Internet of Things, Europe’s economy increasingly relies on the ability to move data across borders.

Interestingly, the EU has strong data protection laws that have coexisted with its trade commitments on data flows for decades. The EU could seek to ensure commercial data flows while promoting its high data protection standards globally.

The risk, as recently highlighted by the European Parliament, is that third countries will justify data localization measures for data protection reasons. Unfortunately the European Commission’s proposed text will encourage exactly that.

Its article B2 states that “Each Party may adopt and maintain the safeguards it deems appropriate to ensure the protection of personal data and privacy.” This is essentially a carte blanche for non-EU countries to introduce data protectionism under the guise of “data protection”. It doesn’t even require that countries can demonstrate that such laws are necessary and done in the least trade restrictive way, as under existing international trade law, which the EU has long been a party to.

On May 22 the 28 European trade ministers are expected to meet and decide on their position. Hopefully they will demand a much more ambitious trade provision on data flows. It is not too late for the EU to lead the charge against data protectionism while promoting data protection globally.