Europe faces a 2019 complex: the output of the United Kingdom of the Union, european elections, with growing presence of formations populist, a deceleration in growth that coincides with the withdrawal of stimulus by the European Central Bank (ECB), a division between the partners on key issues… Sylvain Broyer (Bourg-en-Bresse, 1971) is, despite all optimistic, although certainly not ignoring the risks. “2019 will not be an easy year for Europe,” says the chief economist for Europe of the rating agency Standard & Poor’s Global Ratings.
Question . What can we expect from a 2019 so full of events?
Answer . I would say that the journey will be turbulent. We will have a mild slowdown of european growth, inflation will approach the target, the ECB will start the dismantling of the monetary policy, the Italian Government will end up making an agreement with the EU, there will be a Brexit ordered. I am an optimist. The european economy is resilient and under pressure, always just running the monetary policy and the budget. But it will not be an easy year.
P . We always talk about what can happen to the Uk when you leave the EU, but not the reverse.
R . For the European Union, the Brexit is going to be a nightmare. The EU was never designed to be abandoned, and that’s going to make it very difficult to undo all those institutional links. Uk is an economy of the G7, the first exporter to european financial services and a military power. And from that point of view, this implies a weakening of the EU in a world that lives a major confrontation between two superpowers, and in a moment in which Russia is making its comeback as a global power. In this context, it is not good to display divisions and ruptures.
P . What will Europe in recession for the Brexit?
R . We do not contemplate an exit without agreement and, therefore, we do not consider that the Brexit could cause a systemic crisis, as has been pointed out sometimes the Bank of England. Uk will be the most affected by the departure of the EU and that encourages right away its debt –the more the corporate than the sovereign– the GDP will suffer a cumulative fall of 2.7% in something less than two years, unemployment will exceed 7% and, with the depreciation of the pound, inflation will rub the 5% in the first half of 2019. It will be a nightmare for the citizens and consumers of british, that’s for sure. The rest of Europe will suffer, no doubt, but it will be those countries with the greatest links with the United Kingdom the that most the from suffering and, in particular, smaller economies such as Ireland, the Netherlands, Norway, Denmark. But for Latin america, Asia, and even to the U.S. the impact if what you have will be marginal.
P . How does it affect your expectations the combination of the Brexit with the european elections?
R . The rise of extremism, both left and right, it is happening practically in all of Europe. The first polls for the european elections show that the traditional parties will lose between 5% and 6% of its seats towards the ends, especially towards the extreme right, which means that the political fragmentation of Europe continues. And that in a moment in which Europe must be more united than ever is not a positive trend.
P . What are the example of what the political fragmentation can assume is Italy?
R . The risk of fragmentation would be of a greater rigidity of Europe, with difficulties to adopt new measures of integration, limited budgetary capacities of the Union and even less solidarity. If we analyze the case of Italy, there is a problem of productivity, especially if we compare it with other big countries of the EU. In addition, Italian growth is not sufficiently inclusive of young people, which means that there is a tragic destruction of human capital that may be feeding the populist parties. It is a vicious circle.
P . Rome, as before other, blame Brussels for their woes.
R . Italy has a primary surplus as large as that of Germany, of the 2% of GDP, so its problem is the inability of fiscal policy to boost productivity, invest efficiently, and that is impossible with a burden of interest which represents 4% of GDP.
P . What can we expect then a new episode of sovereign debt crisis in Europe?
R . Italy is one of the countries with the greatest political instability of Europe, where the changes of coalition Government are more common and that this Government will enter into difficulties at some point. But the big difference with the european sovereign debt crisis of 2012 is that they have launched many instruments on the part of the european authorities. Since the European Central Bank, with its policy of quantitative easing and zero-interest rate since the last four or five years, the plan Juncker for a massive investment of which Italy is the main beneficiary. The decrease in bad debts (NPL) is due to the decrease prior in the unemployment rate. Thus, small and medium-sized Italian companies are able to hire thanks to the loans they get from banks in the country backed by european guarantees through the plan Juncker. And what is more important is the lack of contagion of the Italian situation.
P . How will this scenario the future course of monetary policy?
R . The ECB will have to abandon its current policy at some point and there goes despite the fact that recent activity data have been quite weak. But the time has come to leave behind the monetary policy ultraexpansiva, among other things because the Federal Reserve gives an opportunity for the ECB to normalize in part monetary conditions. One of the questions for the ECB whether it will have to be more responsive to the expectations of the market are the TLTROs (operations longer-term refinancing with a specific objective). Part of the market is still expecting the ECB to launch a new TLTRO, but from the point of view of the monetary authority, there are no reasons to maintain this type of operation. The credit is already growing at a rate of half to 0.5% of GDP, the delinquency rate of households and businesses is shrinking, and inflation expectations are adjusted to the objectives. What reason could there be for the ECB to maintain the TLTROs? Is it only for the banks with cheap funding in the long term to comply with the ratios in regulatory? It is not possible, that would imply a collusion of the commandsto the ECB between price stability and financial stability. The sooner you start the ECB to undo the policy ultraexpansiva, the greater the margin of maneuver back to be prepared for the next crisis.
P . What can we expect of the trade war between two superpowers like USA and China?
R . The isolation has never been a source of growth, so hopefully the two parties to find a solution. But I have the feeling that the real issue behind the war business is the technology transfer because if we look at the direct impact of the tariffs imposed by the US about its trade deficit is rather marginal. The greatest impact falls on the trust, which has led to a decline in global investment.
Q. Can we see a deglobalization?
R . It is not impossible because there is a certain fatigue in western societies and the question is whether this will change in the next decade or not. Of time the opening up of the economy, globally, is at the highest levels in history. World trade will grow 3.5% this year, in line with the expansion of GDP, which is normal.
