"Simply, if all of us do everything that we agreed to, then Europe will blossom and grow, in fact in all parts…But we still have a way to go."
– Wolfgang Schäuble, Germany’s Finance Minister (Thomas)
Wolfgang Schäuble was quoted recently in a news article announcing Germany’s 2015 budget. For the first time since 1969, Germany will not acquire new debt and will spend what they take in until 2018 (Thomas). The goal is to drive their debt-to-GDP ratio below 60%, which is a goal set in the Stability and Growth Pact (Thomas). The Stability and Growth Pact and banking sector reforms designed to absorb future financial shocks to the system are key to the Euro Area’s recovery. At the moment, Euro Area governments as an aggregate are leveraged at 96.15% to GDP and are projected to drop to 90.73 in 2018 (“Euro Area GDP Growth Forecast”). The drop will be attributed to economic growth although minor (“Annual Survey 2015” 4). Schäuble went on to emphasize that countries with healthy public finances tend to experience higher growth numbers than those running higher deficits (Thomas). Schäuble’s statements resonate the spirit of the European Commission’s strategy to boost growth in the EU. The IMF forecasts real GDP in the Euro Area to grow marginally at a rate of less than 1% per year until 2019 (Figure 2). After the sovereign debt crisis of 2010 took hold of the Eurozone, the EU devised a strategy called Europe 2020 to set guiding principles for future economic and social cohesion.
In a changing world, we want the EU to become a smart, sustainable and inclusive economy. These three mutually reinforcing priorities should help the EU and the Member States deliver high levels of employment, productivity and social cohesion (“Europe 2020”).
The next three years will test the ability of France and Germany, the dominant co-leaders of the European Union and Euro Zone, to preserve European integration and economically grow the Eurozone in the long run. Europe 2020’s strategy for economic and social progress are three-fold: a coordinated boost to investment to the tune of “at least EUR 315 billion of additional public and private investment over the period 2015-2017,” a renewed commitment to structural reforms, pursuing fiscal responsibility or controlling deficit and debt levels (“Annual Survey 2015 4-5). Given the lingering challenges of the sovereign debt crisis, the Euro Area economies will continue their recovery in the next three years and will have to defer prospects of significant economic growth in terms of 2-3% GDP beyond 2018.
Several factors play a role in hindering the Euro Zone’s growth in the next three years. Political and economic uncertainty cloud the path to economic recovery as debt-ridden governments such as Greece approach divisive elections, implement banking reform under Basel III Accords to safeguard future shocks to the banking systems, and strive to resolve the 2010 sovereign debt crisis. This crisis divided Europe into debtors and creditors with Germany being the largest creditor in Europe. Although Germany’s Finance Minister has repeatedly rejected pleas from France and Italy to stimulate growth and employment with more government expenditures, Germany has responded with calls to embrace austerity measures, which can hinder growth (Thomas). The struggle between economic austerity and fiscal stimulus is driving societal instability. In 2015, Greece is headed into “high stakes” elections while polls are scheduled in the UK, Portugal, Spain, and Sweden ("Country, Industry and Risk Analysis”). If Britain’s Prime Minister, James Cameron, is reelected, he promises an EU referendum in 2017. In the matter of Greece’s potential exit from the Euro and the EU, the German media speculates that if the Syriza, anti-austerity party is elected on 25 January, Greece’s exit is inevitable despite the majority of Greeks voting to stay in the Euro (Pratley). Any member state exiting the EU or Euro Area would…