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As a single market of 28 countries, the EU is a major world trading power. It is the second largest economy in the world after the United States. In 2018, the EU’s GDP stood at an estimated $18.8 trillion, representing almost 22% of the global economy. Its trade with the rest of the world accounts for some 15.6% of all global exports and imports. Together with China and the US, the EU is one of the 3 largest global trading powerhouses.
In recent years, however, a number of issues, including the debt crisis, political upheaval and fragility of financial institutions, have plagued the EU’s economy. In 2016, the Brexit referendum only added to its woes. Slowdown in the global economy continues to hound the EU, with its own economy growing only 0.2% in Q2 of 2019.
The countries that together make up the EU are not just responsible for the growth in its economy, but also for the lack of it. Not all 28 countries have a profound effect on the economic health of the region, especially since only 19 of the member states have adopted the single currency regime of the Euro. The ongoing US-China trade war and the global economic slowdown have hurt some of these larger economies more than others, thereby reducing the EU’s total economic output, as well as the value of the Euro in the international markets.
Here’s a look at the 5 top economies of the EU that have a long-lasting effect on the region’s economic performance.
The German economy is the fourth largest in the world, in terms of nominal GDP. The economy is manufacturing intensive, which has turned out to be the reason for its decline in the wake of a global industrial recession. The German economy contracted 0.1% in Q2 2019 and future projections do not appear too optimistic either. The Ifo Institute has downwardly revised the German GDP growth rate to 0.5%, from the earlier 0.8%, in its joint economic forecast for 2019, released on October 2, 2019.
This decline is a spill-over effect of the rising risks of an escalating US-Sino trade war, together with a disorderly Brexit. All this has led to negative business sentiment and declining industrial demand. Particularly hit is the German auto industry, the main pillar of the country’s export success, with threats of increase in import tariffs by the US President. Orders for German cars are declining in foreign markets, as consumers become more sceptical and the unemployment rate rises.
The 7th largest economy in the world by nominal figures, the French economy hasn’t escaped the effects of sagging global competitiveness and economic growth either. However, economists say that it is faring better than its neighbours, with a projected GDP growth rate of 1.3% in 2019, compared to the below 1% expectation for Germany.
Unlike Germany, the French economy is less exposed to ongoing trade war concerns. The manufacturing sector in France represents less than 15% of the nation’s GDP. The aviation and shipbuilding industries will likely boost exports, while payroll and residency tax cuts could boost consumer spending in 2019.
However, experts say that in the long term, it will be difficult for the country to escape the ill effects of a stagnating German economy. Both countries have strategic economic and political partnerships and France might be unable to grow if Germany continues to struggle.
Like Germany, Italy too is a manufacturing-based economy, with exports ranging from machinery, vehicles and robots to food, clothing and luxury goods. It is also one of the largest producers of renewable energy. However, a rise in public debt and declining employment rates remain critical problems for the economy. All this, together with political uncertainties, has led to weaker growth projections for 2019 and beyond. In September 2019, Italy’s new government cut its growth rate forecast to 0.4% for 2020, from the earlier 0.8%.
Italy currently has the highest public debt levels in the Eurozone, right after Greece, at €2.3 billion. This has led to frequent clashes between the European Commission and the previous populist government. If the current government fails to meet Brussels’ demand to reduce public spending by €23 million, the country could well face an automatic rise in Value Added Tax on January 1, 2020. This will further affect consumer spending and hurt investment sentiment, amidst the global slowdown. The Italian industrial supply-chain has considerable exposure to developments in the US-China trade war, which could also be a deterrent to its growth.
Political uncertainty is certainly a major driver for the Spanish economy, with general elections scheduled for November 2019. Tourism is a major contributor to the national economy, which is currently under much pressure due to the upcoming Brexit deadline, not to mention the collapse of the British tour operator, Thomas Cook. Thousands of jobs in Spain are at risk as a result of this collapse, which is why the government announced a recovery plan worth €300 million on October 3, 2019.
The government has to submit its updated growth projections to the European Union by October 15, 2019. By all indications, it looks like projections could be cut. Spain, along with many other EU countries, like France and Germany, is facing the hard consequences of the World Trade Organisation’s to authorise US tariffs on EU goods worth up to $7.5 million as a response to illegal subsidies given by European governments to aerospace giant Airbus.
Washington will, as a result, impose 25% tariffs on products like olive oil, wine, chees, fruits and other agro-products, which would hurt Spain. According to the Spanish Institute for Foreign Trade, wine and olive oil exports to the US from Spain stood at €700 million in 2018. Additional tariffs could, therefore, have adverse consequences for the country’s economy.
A prosperous and open economy, the Netherlands is known for its stable industrial relations, low inflation rate and a highly mechanised agricultural sector that provides employment to over 2% of its workforce. The Dutch government is following a constructive process to weather the effects of a hard Brexit. The country is currently a destination for hundreds of EU firms that are leaving the UK and looking to set up business elsewhere. In the last three years, over 100 companies have slowly and steadily moved their offices from the UK to the Netherlands.
The government is expecting economic growth of 1.8% for 2019 and 1.5% in 2020, which it says is so far on track. On September 17, 2019, the government further announced an expansionary budget for 2020, focusing on reducing the consumer tax burden, while increasing expenditure on housing, youth healthcare, pensions and the environment. But the international slowdown definitely remains a risk for the manufacturing sector, with Brexit causing a drop in demand for European goods.
The next few months will be crucial, as the EU reels under the effect of the Brexit decision. US economic health will also prove critical in future. It is witnessing recessionary trends in 2019 and is expected to face political uncertainty in 2020. Trading in the Euro and Pound Sterling, therefore, needs robust risk management strategies.
