Benjamin Franklin is quoted as saying: “Without continual growth and progress, such words as improvement, achievement, and success have no meaning”.
Up until a few months ago a US president would have been on firm ground quoting the words of Benjamin Franklin and pointing towards the considerably faster growth of the US than that seen in continental Europe over the past decade, measured either by formal economic growth or by the expansion of corporate earnings.
However, in the first quarter of this year a combination of tough comparisons and inventory build in the US, plus the lagged impact of extremely loose policy by the European Central Bank and a weak euro, saw the Eurozone steal a march and grow faster than the USA, a reality which may well persist for the rest of 2017.
So, you might think that Europe’s growth travails are over, and with them – as observed in the second half of the quote above – all the other political and economic angst that has characterised the last few years? In my opinion – think again. The last few months have been the end of the beginning and not the beginning of the end.
One economic success story of the past decade for Europe has been the expansion of its regional trade surplus despite all the Eurozone internal troubles. A weaker currency, the inherently highly productive and competitive nature of the German industrial base and at least solid growth rates in countries like China and the US all contributed. But it is patently not enough. The populist fear that has pervaded all Eurozone elections over the last year reflects a general malaise that is not going to be sorted out by a continuation of the policies of the last decade. After all, even the OECD in a recent global economic update was sufficiently moved to title it ‘Better but not good enough’.
Which brings us to what the Eurozone should really do: enact long overdue reforms to its labour, taxation and entrepreneurial markets. Economic theory dubs this as ‘supply side change’ in contrast to the demand side improvements typically sourced from central bank stimulus or as a result of lower currency or economic growth in other parts of the world. Such changes however require political will to impose. Shaking up such parts of the economy can unsettle both workers and consumers, as few embrace change readily – at least initially.
This, however, is why right here right now is the time to push the button of change. The remarkable victory of Emmanuel Macron in the French presidential election, supplemented by the general success of his fledgling part in the parliamentary elections on a mandate of change to the French economy, provides an opportunity that is unparalleled in recent times.
France, of course, is the middle ground between the already fairly efficient Germanic bloc and the struggling southern European Eurozone members. A France that embraces change, heightens the flexibility of its labour markets, looks to reduce taxes and boost entrepreneurial zeal has a far better chance of higher economic growth rates compared to the last few years. Inclusive growth is always the best way to fight populism and malaise. The knock-on effects of this will benefit the pan-European economic and political landscape.
Global, mostly American, investors have returned in abundance to the European markets in 2017, to date buoyed by better headline economic growth rates and corporate earnings momentum as well as typically lower equity valuations. However such inflows will not be sustained unless Europe embraces true change in terms of the sources of its underlying economic growth rates. While low interest rates and ECB stimulus will continue for the foreseeable future, real change comes from embracing the supply side. If Europe really wants to change it has to change from within and not rely on the growth of others beyond its borders.
Chris Bailey is European strategist at Raymond James