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Tuesday, December 03, 2019, 11:21
Eurozone is on right path of development
By Hu Kun
Tuesday, December 03, 2019, 11:21 By Hu Kun

The European Union is paying the price for the continuing uncertainty over Brexit and the ongoing US-China trade war with a notable drop in its exports. The latest Organization for Economic Cooperation and Development data show trade remained weak across all G20 economies in the third quarter of 2019. The OECD even warned the slowdown is particularly pronounced in the EU, with its exports contracting by 1.8 percent and imports 0.4 percent.

Since the second half of 2018, the eurozone's economy has faced multiple challenges, including slowing economic growth.

First, the budgetary conflict between the European Commission and the Italian government has had a serious negative impact on the eurozone's banking industry and financial market. And second, since the United Kingdom is a big export market for the EU, a no-deal Brexit would deal a heavy blow to EU-UK business relations.

So by further strengthening economic governance, the EU can ensure mediumto long-term healthy economic development of the eurozone

In addition, the eurozone's economic growth largely depends on exports, as they account for about 28 percent of its GDP. In particular, the deteriorating global trade conditions and the US-triggered trade war against China are hurting the eurozone's economy. No wonder international organizations' growth outlook for the eurozone this year is pessimistic.

However, it seems the risks have been mitigated. On Sept 12, the European Central Bank lowered the interest rate, which has helped ease the conflict between the Italian government and the EC over debts. It has also led to reduced taxes and increased public spending, which in turn would boost growth.

Besides, on Oct 28, the British parliament rejected Prime Minister Boris Johnson's proposal for snap polls (which now will be held on Dec 12), and the EU accepted the UK's request for a Brexit "flextension" until Jan 31, 2020, reducing the chances of a no-deal Brexit.

Also, thanks to the restrictive fiscal policy and structural reform, eurozone countries' national income and financial conditions have improved, especially in export-oriented EU countries such as Germany which have policy tools to stimulate consumption, expand public expenditure and cope with downward economic pressure. As such, if the external environment doesn't deteriorate further, the eurozone's economic situation will likely improve in the short to medium term.

The eurozone is a highly competitive, market-based and open economy, so it is normal for it to experience short-term fluctuations. But since the eurozone is also a monetary union, rising imbalance in economic growth and employment in the eurozone countries can harm their economic development.

To meet these challenges, as well as to ensure price stability and maintain healthy competition, the eurozone has implemented the social market economy model, combining common currency and financial policies with other economic policies. It has also used structural tools to promote development in special areas and industries, and propel balanced regional economic and social development.

But as a non-optimal currency area, the eurozone needs to strengthen structural policies, which could widen the intraregional macro-economic differences, increase risks-which in turn will magnify the institutional design flaws in its financial policy. These factors could lead to a serious economic imbalance in the eurozone and create a vicious circle of banking crisis and sovereign debt crisis.

To eliminate such risks, the EU has decided to strengthen economic governance in the eurozone. It has also established a European stability mechanism so it can use policy tools to ensure macro-economic stability. These measures have improved the eurozone's fiscal and economic indicators since 2013. And by further strengthening economic governance, the EU can ensure medium-to long-term healthy economic development of the eurozone.

In other words, short-term economic fluctuations are a natural phenomenon for a highly competitive economy like the eurozone. The key is how to properly deal with the structural issue of imbalance. But until now, the eurozone, thanks to its corrective measures, has been on the right path of sustainable development.

The author is a researcher at the Institute of European Studies, Chinese Academy of Social Sciences. 

The views don't necessarily represent those of China Daily.


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