European Stagnation and Frustration Deepen Risks for Eurozone

By Marcus Walker 

        BERLIN--Europe's currency union enters 2015 facing the toughest challenges since its government-bond crisis ebbed three years ago.
        Barring a change of fortune or policies, growth in the eurozone could become chronically slow, even by the standards of mature Western European economies. A vicious circle of high joblessness, low demand, weak investment, and inflation so slow it could fall into the negative threatens Europe with long-run stagnation.
        The $13 trillion eurozone economy--still 17% of global economic output--is already nearly seven years into a lost decade. The question now is whether a grinding recovery can pull it out of trouble in the next few years, or whether further political deadlock prolongs the malaise.
        In Greece and Spain, frustration with the political establishment could lead to the election of governments that rebel against German-imposed fiscal straitjackets--only to confront the reality that life in the eurozone increasingly constrains nations' freedom of action.
        France and Italy face tests of their ability to overhaul sclerotic labor markets in the face of vested interests and sagging economic confidence.
        The bright spots: Low oil prices, a weak euro and improving U.S. and global demand are positive for eurozone growth, especially for Germany's sturdy export sector. And the euro continues to attract new countries despite its troubles: Lithuania, the 19th member, joined on Jan. 1.
        Cheap oil might help deliver slightly better growth than in 2014, some economists say. The European Central Bank predicts eurozone growth of 1% in 2015. But the region underperformed a similar ECB forecast for 2014. Falling energy prices could also entrench expectations of negative inflation in Europe, which would weigh further on growth.
        But the threat of deflation is likely to force the ECB to launch large-scale asset purchases soon. Experience elsewhere suggests the effectiveness of such quantitative easing is uncertain. The longer the ECB waits, many economists say, the more difficult it could be to break the shackles of low expectations.
        (END) Dow Jones Newswires

        December 30, 2014 17:48 ET (22:48 GMT)

#Forex
#FX
#MarcusWalker
#EuropeanStagnation
#EuroZone