The European economy involves more than 740 million people in 50 different countries. The formation of the European Union began in 1949, soon after the Second World War, with the creation of the Council of Europe, the first major attempt to bring together ten nations of Europe, with the intention of growing over time. However, the Council focused primarily on human rights and democracy rather than on economic or trade issues, created as a forum where sovereign governments could choose to work together, with no supra-national authority. Yet, in 1999, the European Union, now with 28 members, had introduced the unified currency, the euro, allowing for much easier cash flow within Europe.
Although there is a shared currency, wealth in Europe is not shared equally. Greece, Poland, Romania, Slovenia, and the Czech Republic are poorer than others in the European bloc, though most European countries have a GDP per capita higher than the world's average and are very highly developed.
The European Union's GDP was estimated to be USD18.8 trillion in 2018, representing about 22 percent of the global economy, with the largest economies being Germany, the UK, and France. Outside of the European Union, other large European economies include Switzerland, Norway, Iceland and Liechtenstein which have bilateral agreements, participating in the European Single Market without joining the EU. These countries add to Europe's GDP, which means that in total, Europe is the wealthiest economy in the world and Western Europeans enjoy a high-average living standard.
The European Union and growth
By 2000, the economy of Europe became dominated by the 15 full member states of the EU, which grew to 28 members by 2013. Probably the EU’s most important function is being a common single market, which consists of a customs union, a single currency (adopted by 19 of the 28 member states), a Common Agricultural Policy and a Common Fisheries Policy.
2008: Global financial crisis
In 2008, the global financial crisis hit most of the European economies, which led to the even more challenging Eurozone debt crisis, which threatened the collapse of southern economies particularly Greece, Italy, Portugal, Spain as well as Ireland, though survival came from a massive bail-out program and today, growth outlook in general remains optimistic for Europe, although uncertainty still surrounds the ability of Greece to manage its debt payments.
2019: Positive economic trends forecast
Europe has seen strong growth over the past couple of years despite the challenges that go beyond the effectiveness of fiscal and monetary policies to boost growth, going into areas such as trade relations with the US, innovation, and Brexit. The positive economic trend is set to continue within the EU due to domestic demand, though it has expanded at a slower rate than predicted, from 2.8 percent in 2017 to 2.3 percent in 2018, with the International Monetary Fund (IMF) giving a growth forecast of just 1.9 percent in 2019.
Consumer spending has been critical to the recovery of countries in the Eurozone, and this is expected to continue growing, although at a slower rate. This is due to improved employment figures, though overall the EU has an average unemployment rate of seven percent, which still impacts on wealth levels and consumer spending.
Analysts suggest that without structural reform, the financial outlook in the medium term will continue to slow down as the environment has become less supportive for growth. These reforms are related to the global economic crisis in banking systems and include potential risks from asset bubbles, and risks associated with the reversal of extremely low-interest rates as well as the external demand for goods continuing to fall.
Manufacturing and automotive
In addition to consumer markets, industrial manufacturing and the automotive industries are expected to continue being the major sectors contributing to Europe’s positive financial outlook. Capacity is now reaching levels last seen before the global financial crisis. This maturing business cycle means there are issues of production capacity constraints, and labor shortages there are constrictions on growth, particularly in the newer EU member states, which are not expected to be sorted out swiftly.
Manufacturing and the vehicle-building industries are already the largest industries in many European countries, but the strongest financial outlook remains within the services sector, in technology, media, and entertainment and in financial services.
Higher oil prices
Another challenge to growth is the higher cost of oil which have dampened incomes. Over the twelve months since Spring 2018, energy prices have increased seven percent. Oil prices climbed to around USD60 a barrel in September 2018, up from USD42 the year before. As a result, real disposable income has fallen, on average, by 0.5 percentage points of GDP in most of Europe. However, thanks to investments, Norway and Russia, have benefitted from these changes.
The International Monetary Fund has revised growth downward in about half of the countries in Europe, which goes against previous year trends. The downward revisions have been made to reflect weaker external demand and higher energy prices, but most countries in the region will do well, though Greece, Turkey, and Italy are expected to continue struggling the most.
Tax and Spend
Financial authorities, both within the EU and in the rest of the region have largely chosen fiscal policies that have been stimulating the economy during the current period of economic expansion. This has meant that deficits have remained relatively large even though there have been years of strong growth.
The suggestion is that for a positive financial outlook, policymakers should seize the opportunity offered by continued growth and low unemployment to advance growth-friendly policies to reduce high levels of public debt and rebuild resources for another lull or depression. Vulnerable countries must reduce their deficits and lower their debt, and all countries need to work much harder on structural reform to boost growth and jobs.