The official blog of BNP Paribas Asset Management

Yes, Europe is indeed back

Whatever the language, you probably got the message. We won’t have to repeat it in the European Union’s 24 official languages.

Whatever the language, you probably got the message. We won’t have to repeat it in the European Union’s 24 official languages.

“Europe is back!” – and not just because the President of the European Commission, Jean-Claude Juncker, said so before the European Parliament on 13 September during his State of the Union address. This annual speech is mostly an exercise in politics, and we will not comment on it here, especially as the full speech is readily available from the European Commission. But we felt it was worth sharing our impressions with our readers after a colloquium we attended recently on the theme of reforms in Europe.

Most speakers agreed that the economy is on the right footing, and the consensus appeared to agree with Jean-Claude Juncker that “Europe now has more wind in its sails”. Growth accelerated significantly, to 2.3% in the second quarter of 2017; year-on-year GDP growth is at a high since 2011 and has far surpassed the European Commission’s 1.2% estimated potential growth rate. GDP is now 8% above its level of 10 years ago. Per capita GDP is rising at about the same pace as in the US, i.e., at around 1.5%.

Exhibit 1: GDP growth per capita for the US, Europe and Japan between 1998 and 2017


Source: Datastream, European Economic Forecast Spring 2017, BNP Paribas Asset Management, as of 18/09/2017

A new approach to reforms in Europe

A more solid economy is, of course, good news, but GDP growth should not be the alpha and omega of economic policy, especially as governments are seldom able to make short-term tweaks in overall trends in the global economy. Taking a long-term approach is no doubt less gratifying, but is essential, and, barring reforms, the pay-off in terms of growth will be uneven.

This is where the OECD’s “Going for Growth” initiative comes in. It is meant not just for European Union countries and suggests that governments set up structural policies in various areas, in other words, that they undertake reforms. Undeniably, the OECD had for many years repeated mantra-like the need for all countries – with almost no distinction – to reform their labour markets or make them more flexible. This call increasingly fell on deaf ears.

Times have changed and the editorial of the OECD’s document opens with the observation that:

“The prolonged period of stagnating living standards that has affected a large share of the population in many countries is undermining confidence in governments’ reform agendas and raising stiff political resistance to continued efforts.”

As for the EU countries, the OECD’s new approach differs from the European Commission’s European Semester, under which it made recommendations that ‘provide policy guidance tailored to each EU country’ over the next 12 to 18 months.

By their very nature, these recommendations are more ‘traditional’, in that they consider reforms to be a way of complying with the Growth and Stability Pact, the priority of which is to prevent excessive public deficits. The OECD, meanwhile, focuses far more on ‘public investment in basic education, R&D and infrastructures, [as well as] spending on programmes to help workers upgrade skills’.

When it comes to France, the OECD lays down priorities that are both more precise and more ambitious. The general outlines are provided below, but it is worth reading the four-page document that goes with them, as the recommendations are more subtle than their summary would indicate.

Exhibit 2: Recommendations made to France in July 2016 by the European Commission and in March 2017 by the OECD

backSource: OECD, European Commission, BNP Paribas Asset Management, as of 18/09/2017

Our feeling is that, over time, the OECD’s approach will take precedence, or rather, that the European Semester, which has been in place since 2011, will adopt a more pragmatic approach, for the good reason that its recommendations seldom produce immediate effects. Meanwhile, the Macroeconomic Imbalance Procedure (MIP), which is summarised in a dashboard, while important, could give the impression that ‘Europe’ is forcing its member states’ hand.

The case of France

We did not choose France at random from among the 28 EU countries. It is now clear that the election of Emmanuel Macron, who throughout his campaign wore his European convictions on his sleeve, has raised much hope in Brussels and his government’s actions will be followed closely in Berlin.

The more or less openly expressed hope is that, after insisting in the 1970s that ‘it is not possible to reform the United Kingdom’, then in the 1990s that ‘it is not possible to reform Germany’, die-hard pessimists will end up regretting saying that ‘it is not possible to reform France’.

The process has barely begun, but Macron wanted to avail himself of the legislative means to move quickly. Let us hope that Macron, who has put together an unusual government, has more the OECD’s approach in mind than the European Semester approach. It is not easy to quantify the economic impact that the measures could have, but a target rate of 7% for unemployment at the end of Macron’s term (vs. 9.2% currently) was batted about during the campaign.

Whether this can be achieved depends on many factors and, above all, on how they interact with one another. But at the very least, it is worth asking why unemployment has stayed so stubbornly high in France without falling back on the excuse that such a level cannot be avoided.

Exhibit 3: Unemployment rate in France, 1975 - 2017

backSource: INSEE, BNP Paribas Asset Management, as of 18/09/2017

Exhibit 4: Unemployment rates in Europe, 2004 - 2017

backSource: Datastream, BNP Paribas Asset Management, as of 18/09/2017

Europe works!

In a forthcoming article we will explain what’s behind our thinking with regard to the statement 'Europe works!' In the meantime, take some time to look at this chart from the European Commission’s latest ‘Standard Eurobarometer’, which was released in July 2017 and is based on field surveys done two months earlier, just after the French presidential election, an event that shook the world (or, at least, the French government bond market). Suffice it to say that citizens of eurozone countries have never been so fond of the single currency.

Exhibit 5: Responses, for/against, to a survey question "Are you in favour of a European economic and monetary union with the single currency, the euro ?" (% of respondents for or against in 22 EU member states in the spring of 2017)

backSource: European Commission, Eurobarometer Spring 2017, Public Opinion in the European Union, BNP Paribas Asset Management, as of 18/09/2017

Written on 18/09/2017

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