Europe: Forged in crises – Standard Chartered
Expect weak growth in 2025, a high risk of recession, and the ECB forced into accommodative policy. It is possible that a more benign tariff outcome or resilient European consumers mitigate downside risks. A more forceful policy reaction is also possible, either via fiscal, trade or institutional channels, Standard Chartered’s Economist Christopher Graham notes.
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“We have written extensively over the past few months on the structural economic issues facing Europe, as well as the trade and foreign policy risks presented by the incoming US administration. We think it is worth at least considering the optimistic angle. There is significant doubt over Trump’s approach to tariffs, how countries will be impacted, and whether Europe’s efforts to negotiate carve-outs are successful, so there is a pathway to a more benign tariff outcome. It is also possible that the European consumer is more resilient next year as rates fall and the labour market remains tight.”
“But how Europe responds to its economic problems also matters. ‘Forged in crises’, references the belief of Jean Monnet, one of the EU founding fathers, that European integration would be propelled by periodic crises. We have seen European institutions become stronger in the aftermath of previous economic challenges; next year’s headwinds – an emerging tariff war, or changes to US security guarantees in the region – could catalyse similar progress. And there is plenty that policy makers could pursue on this front, from completion of banking and capital markets unions to addressing Europe’s competitiveness issues.”
“However, we think the political will to push forward in these areas is currently lacking; we also recognise that the inexorable shift towards ‘more Europe’ that has emerged from previous crises has been met by growing support for populist parties, something that could offer a countervailing force to further European integration now. Where progress seems more likely is on the fiscal front. We do not think another suspension of the fiscal rules is realistic, but greater flexibility being applied to those rules is possible, alongside potential agreement to increase common borrowing.”