Europe's headline risks may be rising – even if Ukraine war ends

Defence spending is set to rise, and the market froth around the Al space is a concern.

- Ravi Velloor

On the face of it, the macroeconomic landscape across the countries that use the euro common currency would seem to be broadly reassuring. Inflation is at a tolerable level across the 20 economies – soon to be 21 with the addition of Bulgaria - that comprise the euro area. Unemployment, at below 7 per cent, is at a 30-year low.

Debt to gross domestic product (GDP) ratio is at a healthy 89 per cent, compared with the astounding levels of other advanced economies such as the US or Japan.

Projections are for the euro zone’s growth to slow from 1.4 per cent in 2025 to 1.2 per cent in 2026 - but at least the area’s economy is expanding.

Time to rest the oars a bit after the rampages of the Covid-19 pandemic and nearly four years of Europe’s deadliest conflict since World War II because of the Russian invasion of Ukraine?

Not really, says Mr Pierre Gramegna, who heads the European Stability Mechanism (ESM) - the continent’s equivalent of the International Monetary Fund.

"The half-empty part of the glass is the far-from-perfect productivity growth in Europe in the last 10 years - about 0.6 per cent per year compared with double that in the US," Mr Gramegna told me in an hour-long conversation. "The second issue we have is under-investment. Europe's savings rate is one of the highest in the world, yet this is not translated into investments in the euro zone but invested all over the world."

While the euro zone managers are competent enough to manage their economies if left to themselves, external factors that bear on them are beyond their control – the continent’s exposure to shocks is exacerbated by the fact that so much of European savings is invested abroad.