Long-term prospects for Europe brighten despite current stagnation

Europe continues to experience economic stagnation, but prospects long term have improved significantly in the past 12 months, Joachim Fels, Chief International Economist & Co-Head of Global Economics at Morgan Stanley, told the global investor forum held by PERE in Amsterdam on Thursday.

Commenting on the future for the Eurozone, Fels said that until recently he had been a pessimist, citing moves by Germany and France in the past decade to unravel the European stability pact. Now, however, there was greater cause for optimism, he said, due to recent changes in response to the crisis. ‘I think the risk of a negative scenario – or a European divorce - is much reduced. I think there’s a much better chance now of it all ending up in a European renaissance.’

Fels cited three reasons for his new optimism. First, economic rebalancing in the euro area was progressing, he said, and countries like Ireland and Spain were starting to regain their competitiveness after massively cutting their deficits. Meanwhile surplus countries like Germany were seeing their labour costs increase, he pointed out.

Second, European governments had understood the need to create the right institutions to back political union and were making the right moves to put the three pillars for monetary union in place. Banking union is now on the agenda while a road map for fiscal union is to be discussed at the next European summit in December, Fels noted.

Lastly, the European Central Bank has stepped up as a potential lender in last resort for European governments. All these moves together represented a veritable ‘sea change’, he argued.

Fels stressed that he was now a long-term optimist on Europe rather than a pessimist, but that he remained pessimistic in the near term. ‘Europe only progresses through crisis and we’re seeing some backtracking now.’ Europe's progress through the crisis is occurring in phases which Fels described as the CRIC cycle (crisis, response, improvement, complacency). He added that the Eurozone was back into a complacency phase now after experiencing some improvement due to a response to the previous crisis.

‘Europe will not move in a straight line but through a series of CRIC cycles,’ he predicted.