euro

The eurozone economy, for so long a source of uncertainty, has enjoyed its best year in a decade, clear evidence it has broken out of the prolonged debt crisis that raised fears about the very survival of the euro currency.

In its first estimate for the fourth quarter, Eurostat, the European Union’s statistics agency, says Tuesday that the eurozone expanded by 0.6% in the October-December period from the three months before.

Read: Hard year ahead for U.S. dollar: Desjardins

That more-than-healthy level of growth means that for the whole of 2017, the eurozone economy expanded by 2.5%. That was up from 2016 and its best performance since 2007, when it grew 3%. The eurozone even grew faster than the U.S., which expanded by 2.3%.

“Economic growth has shifted to a substantially faster growth path over the course of 2017,” says Bert Colijn, senior eurozone economist at ING. “While detailed breakdowns have yet to be released, it seems that the eurozone economy continues to fire on all cylinders.”

In the decade since 2007, the eurozone has had to grapple with one crisis after another, starting with the financial crash of 2008 that prompted the deepest worldwide recession since World War II. That exposed the weak underbelly of the eurozone — the state of the public finances in a number of member economies.

Read: Which currencies are gaining on the U.S. dollar

Four countries — Greece, Ireland, Portugal and Cyprus — had to be bailed out by their partners in the eurozone and the IMF, and in return they made deep budget cuts to get their public finances into shape, hitting their economies hard. The Greek economy, for example, shed around a quarter of its output, and saw unemployment and poverty levels ratchet higher.

It’s only recently that existential concerns surrounding the euro have eased. Greece, notably, is set to emerge from its bailout era this summer, eight years after it first faced potential bankruptcy.

With fears of a breakup of the eurozone largely evaporated, confidence across the bloc has risen. That’s evident in the fact that growth isn’t just reliant on the big economies of Germany and France. Stronger growth is being recorded in those countries that were at the forefront of the crisis and that’s helping to bring down unemployment, potentially reinforcing the recovery even more.

Read: Expect lagging loonie in 2018

Following the defeat of several populist political movements in elections in 2017, such as in France and the Netherlands, there are fewer fears about the prospect of anti-euro politicians taking the helm.

The ECB and euro

Meanwhile, the recovery has been boosted by the European Central Bank’s massive stimulus program and its move to slash interest rates. The wider global economy — in particular trade — is also on the up, and that’s supporting the eurozone’s exporters.

That combination of positive factors is expected to hold in 2018 and growth is anticipated to come in around 2017’s level.

Potential headwinds include the recent rise in the value of the euro, particularly against the dollar, which makes eurozone exports less competitive in international markets, and less stimulus from the ECB.

Read: Which Morningstar index performed best in 2017?

Following the growth figures, the euro advanced further towards its recently hit three-year high-rate against the dollar, and was trading 0.4% firmer at $1.2433.

Meanwhile, electoral considerations will remain a feature of eurozone life. The next potential hurdle is the Italian election in March, when euroskeptic parties are predicted to do well if not win outright.

“A hung parliament is one of the most likely outcomes as established parties continue to lose ground against the populist Five-Star movement, Silvio Berlusconi’s Forza Italia movement and the nationalist Northern League,” says Kay Daniel Neufeld, managing economist at the Centre for Economics and Business Research.

Originally published on Advisor.ca
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