Mario Draghi can only do so much.

Photographer: Martin Leissl/Bloomberg

Europe's Sluggish Growth Is a Global Threat

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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Third-quarter economic quarter growth for the euro zone came in slightly higher than expected -- enough for politicians to be tempted to proclaim that growth is back. They should resist that urge and instead do a lot more to revamp, reinvent and re-energize the bloc’s growth engines. 

If anything, the 0.2 percent growth rate released this morning by Eurostat confirms that Europe faces a significant growth deficit -- past, present and future. This should worry more than just the continent, which still faces the threat of a lost decade. It should also warn other countries of the headwinds facing the world economy as a whole. And if individual countries are pushed into following a "beggar thy neighbor" strategy, nothing less than disorderly deglobalization could threaten the world economy.

 Here are seven reasons why: 

  1.  Today’s gross domestic product numbers highlight the extent to which Europe’s growth engines are sputtering. And it isn't the usual reason related to the smaller economies on the periphery. In fact, these countries now account for the best relative performance within the euro zone, with Greece emerging out of recession with a 0.7 percent growth rate and Spain coming in at 0.5 percent. The weakness is now more concentrated in the big three -- France, Germany and Italy -- whose combined growth rate is only slightly above zero.
  2. In addition to battling cyclical impediments to growth, including that coming from fiscal austerity, Europe is dangerously close to entering an era in which inadequate growth and price deflation feed on themselves. This disruptive pattern has haunted Japan for 20 years, and has made it ever more difficult for the country to make an economic breakthrough.
  3. Given Europe's dependence on trade and the exposure of some of its banks, the geopolitical tensions with Russia are aggravating the continent’s growth risks. Even as Europe desperately needs sources of demand for what it produces, exports are being hit by Russia’s imploding economy and the rising threat of a financial crisis there. Having failed so far to dissuade President Vladimir Putin from intervening in eastern Ukraine, Europeans are under rising pressure to intensify sanctions (their only weapon at this stage) and, in the process, risk counter-sanctions that would tip its economies into a recession.
  4. Europe’s growth deficit has implications for its future social and political well-being. Durably high and inclusive growth is required for the continent to make a strong dent in its unemployment. With long-term and youth joblessness already alarmingly high in several countries, the more elusive the recovery and the greater the risk the problems are embedded in the structure of the economy. This is about the prospect of a lost generation, not just of a lost decade.
  5. Forced by circumstances to use imperfect tools, the European Central Bank is the only game in town. But the resulting policy response is inevitably too partial and is likely to be ineffective when it comes to genuine growth creation. ECB President Mario Draghi has alluded to the first part of this, most recently in Rome when he noted the need for governments in the euro zone to deliver on “supply- and demand-side policies." It is part of a bigger challenge that requires supporting the Europeans' monetary union and completing a proper union of their banking sectors, as well as more effective coordination of the countries' fiscal stances and better integration of their political institutions.
  6. The more Europe is frustrated in its attempts to come up with new engines of growth, the more likely it is to try to capture others' growth. It isn't the only big economy trying to do so. Japan has weakened its currency to make its exports more competitive and take market share from others. Europe is trying to do this now too. If such a strategy isn't accompanied by an incremental creation of growth at the global level, the result is a zero-sum game that is sure to undermine international policy coordination, risk financial instability and fuel excessive economic nationalism.
  7. The world's growth engines aren't powerful enough to pull the caboose of Europe with a quasi-permanent growth deficit. The danger is that, especially with slowing activity in emerging economies, Europe could end up dragging down the most robust countries (particularly the U.S., which the rest of the world is looking to as a global growth locomotive).

 Yes, today's growth numbers were slightly better than expected. Yet they remain too low. The question is whether the accumulating growth deficit will finally push politicians -- in Europe and beyond -- to respond with determination and courage to carry out actions that the situation requires.   

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mohamed A. El-Erian at melerian@bloomberg.net

To contact the editor on this story:
Katy Roberts at kroberts29@bloomberg.net