Europe Shouldn't Let a Good Recovery Go to Waste

The euro-zone boom can only last so long. Now is the time to complete the monetary union.

Lots of reasons for the euro zone to celebrate, but for how long?

Photographer: GUILLAUME SOUVANT/AFP/Getty Images

Europe could not have asked for a better end to 2017. This week, data from the Markit Purchasing Managers' Index showed that economic activity was the strongest in nearly seven years. The unemployment claims rate in Germany is at its lowest level since the early 1990s. Even Greece's factories are enjoying the best run in nearly a decade.

Indeed, the euro-zone economy must surely rank near to the top of any list of positive surprises of 2017. The European Commission believes the currency union expanded by 2.2 percent last year -- compared with a 1.5 percent forecast from just 12 months before. All countries appear to have joined the party: Measures of growth disparity have fallen to the lowest level since the creation of the euro.

Doomsayers are likely to be proven wrong again this year, as the cyclical recovery from the sovereign debt crisis and the ensuing recession continue. However, betting on the euro zone's long-term future is still risky. While the odds of a collapse of the euro zone have been significantly reduced, the steps required to make the area more resilient to economic shocks remain elusive. And since growth differences between member states are unlikely to disappear, the need for greater integration will remain just as strong.

Europe's boom is expected to last into 2018. While unemployment is falling, it remains high, especially in countries such as Italy or Spain, allowing further growth without fueling significant price increases. At 1.4 percent, inflation remains below the European Central Bank's target of just under 2 percent and is forecast to hover around that rate for most of the year. As a result, the European Central Bank was able to announce it would continue to buy corporate and government bonds until September at least. In turn, this should stimulate lending and, ultimately, consumption and investment.

There are, of course, risks on the horizon. Italy will hold a general election at the start of March and anti-euro forces are set for a strong showing: Political instability could spook markets and derail the recovery in the euro zone's third largest economy. Spain is still grappling with a separatist threat in Catalonia. Across the euro zone, inflation could climb faster than expected, forcing the ECB to bring its bond-buying scheme to a halt.

These threats are small, however, compared to the real problem haunting the currency union: the difference between the wealthier core countries and poorer peripheral members, who have accumulated a large gap in competitiveness since the creation of the euro. Countries such as Spain, Portugal and Italy have embarked on a plan of ambitious labour market reforms since the start of the decade, which will help to make their economies more dynamic. France, a slow-growth member of the core, joined last year with the election of President Emmanuel Macron. However, these efforts will not be sufficient to close the gap with other member states such as Germany. Economic logic will continue to demand greater risk-sharing, which would be valuable even if a rich country were to face a crisis.

For all the good intentions of recent months, there is little reason to believe that politicians will address the institutional shortcomings that make the euro zone vulnerable to shocks. This means completing the banking union, to ensure that countries are not left alone in dealing with a banking crisis; And building elements of a fiscal union, to ensure that more common spending goes into a country that is facing an economic shock, whether to fund infrastructure or to help retraining the unemployed.

Unfortunately, none of these reforms appear close. The European Commission has set out an ambitious roadmap, but it is unclear this has support from governments. And while Angela Merkel, Germany's chancellor, has pledged in her New Year's speech to team up with France to make the EU more resilient, she has so far failed to form a government, three and a half months after a general election. Even if she were to succeed, the German public do not support measures that would enforce much greater solidarity among euro zone member states.

The euro zone is unlikely to experience a repeat of the existential crisis that nearly dismantled it at the start of the decade: Since then, it has established a sizeable rescue fund, the European Stability Mechanism. The ECB has proven it can intervene in the bond market in the event of recession and deflation. This will make investors think twice before betting that a country will leave the currency union. However, simply avoiding a new catastrophe is not sufficient for the euro zone to thrive; further reforms are needed. We can feel good about Europe in 2018. Beyond that, the case for optimism is less clear-cut.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Ferdinando Giugliano at

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    Therese Raphael at

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