EU Economy's Sluggish Expansion May Potentially Rebound
The European economy, despite facing numerous hurdles, has managed to show resilience and steady improvement.
In a significant development, higher tariffs are expected to dampen growth in the third quarter, as exporters adjust to a 15% across-the-board duty. Simultaneously, the EU has reduced tariffs on U.S. industrial goods, a move that could potentially offset some of the negative impact.
The economy, however, is expected to pick up in coming quarters. The Purchasing Managers' Index for the currency bloc and other economic data have shown steady improvement this year, pointing towards a promising future.
One of the key factors contributing to this improvement is the €1.2 trillion spending program launched by the current German Chancellor, Friedrich Merz, who was sworn in on May 6, 2025. This program, focused on defense and infrastructure, is set to positively influence the European economy.
However, the European economy has a long history of challenges. After the 2008 global financial crisis, European economies engaged in aggressive fiscal cuts. Despite this, the private sector's debt load has fallen from a peak of 110% of GDP to 95%, the lowest level in 17 years.
Unfortunately, debt remains a problem for some European countries, particularly France, which is facing a budget crisis. The political crisis in France has forced President Emmanuel Macron to appoint a fifth prime minister in less than two years, raising concerns about the country's ability to rein in its ballooning budget deficit.
The rise of populist parties in Europe threatens to slow down or derail the EU's plans for further integration. However, the EU remains committed to deepening integration and addressing fragmentation. Positive sentiment towards the common currency and the EU is at an all-time high among Europeans.
The euro area's economy, which includes the 20-nation currency area that uses the euro, grew at a pace of 0.1% in the second quarter. Despite the U.S. tariffs, the eurozone economy has so far avoided a contraction.
Another crucial factor for European growth is a healthier banking sector. Banks in Europe account for about 70% of firms' borrowing, making their health a key determinant of European growth and capital spending. European banks have rebuilt their balance sheets, with non-performing loans no longer a threat, capital and liquidity ratios robust, and profitability improved.
Households and corporations in Europe are also in a strong financial position. Debt servicing ratios are healthy across Europe, except in France. This, coupled with the EU's efforts towards a capital market union to make European capital markets deeper and more liquid, bodes well for the future of the European economy.
After years of economic adjustments, the EU is in better shape, with the private sector now faring much better. Despite the challenges, the European economy continues to show signs of resilience and growth.
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