MOHAMED A. EL-ERIAN
The eurozone economy urgently needs a more comprehensive pro-growth policy approach at both the national and regional levels, or else a second lost decade will be all but assured. Hope for the continent now rests squarely on the shoulders of Christine Lagarde, the highly accomplished incoming president of the European Central Bank.
A highly regarded doctor assumes the care of a chronically impaired patient who is growing weaker and more vulnerable. The patient’s longstanding treatment is not only becoming less effective; now it is also introducing harmful side effects. A better approach exists, but it is not available at the new doctor’s hospital. And in the facilities where it is available, the doctors are too distracted to take on the case.
The new doctor is Christine Lagarde, the widely admired former managing director of the International Monetary Fund who will soon succeed Mario Draghi as president of the European Central Bank (ECB). Her challenge will be to avoid a second lost decade of low, insufficiently inclusive eurozone growth. How the patient fares under her care — and whether she can get key eurozone governments to provide the necessary treatment – will define not just her own legacy, but also that of Draghi.
There is now little doubt that the European economy is losing momentum. The earlier, overly optimistic prognosis of a sustained growth pickup has finally given way to the grim reality that both structural and cyclical headwinds are bearing down on economic activity. The previous consensus growth forecast of around 2% for 2019 is now converging on around 1%; it could well go even lower.
Still to come is a broader realization that Europe is at risk of suffering what economists call “stall-speed growth.” Under such conditions, growth may remain positive, but it will be insufficient to accommodate the demands of other forces: pockets of excessive indebtedness, rising demand for social services, the need for better infrastructure, and deepening popular anger, political polarization, and alienation.
Moreover, previously unthinkable conditions that could undermine the very integrity of a market system will suddenly become possible — even likely. Negative interest rates in Europe, for example, do not look likely to be reversed any time soon. Worse, in what is already a structurally impaired economy, Europeans have yet to deal fully with the detrimental impact of global trade tensions, which have hit export-dependent industries in Germany – the region’s powerhouse – especially hard.
Mohamed A. El-Erian, Chief Economic Adviser at Allianz, the corporate parent of PIMCO where he served as CEO and co-Chief Investment Officer, was Chairman of US President Barack Obama’s Global Development Council.