Terror and Refugees May Weigh on Euro-Area Economy, EU Says

  • `Geopolitical tensions' impacting global outlook, bloc warns
  • High private and public debt `holding back' investment

Conflict in the Middle East, the biggest wave of refugees to Europe since World War II and the terrorism threat is having an impact on the euro area’s economy, the European Commission said, underscoring the fragile nature of the region’s recovery.

With euro-area growth forecast to be 1.8 percent in 2016, compared to 2.8 percent in the U.S., the European Union warned that international instability could further undermine efforts to resuscitate the currency zone’s economy.

“There are a number of conflicts in our neighborhood and, as regards security challenges, of course this is something we need to pay particular attention to in the aftermath of the Paris terror attacks,” European Commission Vice President Valdis Dombrovskis told a press conference in Brussels. “It’s premature at this stage to draw far-reaching conclusions as regards the impact of those factors on the economy,” he said.

“We need to monitor those tendencies quite closely,” Dombrovskis said.

The deepening chaos in nations from Libya to Syria has spawned an unprecedented wave of more than 860,000 people seeking shelter within the EU this year. The influx opened divisions within the bloc as German Chancellor Angela Merkel insisted Europe must honor its asylum commitments while other leaders such as Hungary’s Viktor Orban complained of the strain on their communities.

“The unprecedented inflow of refugees and asylum seekers over the last year has represented a significant new development in some member states,” the commission said in its annual growth survey released on Thursday in Brussels. “Security concerns and geopolitical tensions have intensified and the global economic outlook is becoming more challenging.”

This has an “immediate impact in terms of additional public expenditure in the short run,” the commission said in its report, adding that in the longer term it could have a positive effect on labor supply and growth as long as governments pursued the right policies and helped refugees integrate.

It’s too early to assess the precise impact of the Paris terror attacks of Nov. 13 and the associated threats on the French or Belgian economies, EU Economy Commissioner Pierre Moscovici told reporters in Brussels.

‘Decisive Factor’

“There is one decisive factor and that is confidence,” Moscovici said. “Our open societies are able to resist terrorism; our open economies can resist terrorism.”

While unemployment in the 28-nation EU is expected to fall from record levels to 9.2 percent in 2016 and 8.9 percent in 2017, long-term joblessness, particularly among the young, is still too high, the commission, the bloc’s executive, said.

High private and public debt is “holding back” investment, the commission said, while there’s an urgent need to improve investment regulation, address disincentives to entrepreneurship, and provide more effective social-protection systems, the commission said.

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