Europe Does Not Lift Growth to Its Potential, IMF Rep States

Europe’s recovery is falling short of its full potential, the medium-term outlooks for its economy is “no better” as “Europe has fallen behind”, Director of the European Department of the International Monetary Fund Alfred Kammer said during a press briefing presenting October 2024 Regional Economic Outlook for Europe.

Europe’s economic policy was harshly criticized by the IMF official, concluding europeans have not become productive enough, trade become too fragmented and haven’t got enough advantage of the EU’s single market.

Russian invasion of Ukraine in February 2022 also impacted economic shock in Europe due to sharp rise in commodity prices. “The main reason why Europe is doing poorly is the large Russian-induced energy price shock Europe is going through,” Kammer stated.

Altogether, these factors resulted in worse economic results for the region. “Compared to the US, income-per-capita is 30% lower and a cap has remained unchanged for two decades,” the official noted.

The IMF forecasts that advanced European economies will grow by 1% in 2024, 1.4% in 2025, while economies in the Central, Eastern, and Southeastern Europe (CESEE) region are projected to grow by 2.3% in 2024 and 3.1% in 2025.

Kammer noted that Europe is recovering from inflation shock though the financial conditions are still tight as the easing cycle will take time to take effect after central banks decreased interest rates. Also, there is a high level of uncertainty that keeps consumers and investors in Europe cautious.

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Inflation in Europe is expected to reach its targets by mid-2025 in advanced European economies, and by the end of 2026 in the CESEE region. The IMF recommends advanced economies to reduce rates steadily while the CESEE region should be more cautious because inflation in these countries is further above targets and stickier, the report writes.

Medium-term reforms are urgent for Europe, according to Kammer. Three factors holding Europe back from economic growth are:

• fragmented European markets that cannot provide the scale needed for companies to grow;
• Europe has no shortage of savings, but it fails to boost young and productive firms;
• Europe is missing the skilled labor the region needs. 

Kammer said the EU single market can solve these issues. For this, the authorities must remove the barriers from the free flow of goods, services and capital between countries.

Additionally, Russia’s full-scale invasion of Ukraine also worsened Europe’s economic prospects, especially because of energy prices shocks Russia caused.

The invasion also caused a more severe tightening of monetary policy. “If you look at the tightening side, that had to be harsher simply because the inflation was higher. That is a result of the Russian war in Ukraine,” Kammer said.

The war also created uncertainty for consumers who are worried about energy prices. Investors became concerned about the medium-term prospects, because of the atmosphere created by Russia’s aggression.

“And these headwinds will stay with Europe for the time being,” Kammer said.