Commissioner Gentiloni humbly asks for more ━ The European Conservative

On November 15, the European Commission published its outlook for the EU economy for the next few years. It can be summed up in two words: shy desires.

Economic Commissioner Paolo Gentiloni presents the outlook and looks like Oliver Twist from Charles Dickens’ classic. While the little boy humbly asks for a little more food, Commissioner Gentiloni piously hopes for a little more economic growth.

His timid stance is appropriate: the entire argument for economic growth in the Commission’s outlook rests on slightly lower inflation and a slight fall in interest rates.

To be honest, I would also be humbled if I had to present this report to the people of Europe. The expected adjustments in inflation and interest rates are moderate and therefore suggest small increases in GDP growth. There are usually other sources of growth available to the economy, including high demand for labor, which drives up money wages as employers compete for workers. However, with unemployment remaining in the 6-6.5% range (for the Eurozone; 6% for the EU as a whole), there is little chance for Europe’s workforce to benefit from excessive labor demand.

This clearly means that the only growth engine of the European economy, the real wage, depends on a return to price stability and the continuation of the ECB’s interest rate cutting policy. Given these two events – which is likely – the Commission forecasts that the euro zone’s GDP will grow by 0.8% this year, by 1.3% next year and by 1.6% in 2026. The figures for the EU as a whole are slightly higher: 0.9%, 1.5% and 1.8% respectively.

These are modest numbers to say the least. From the Commission report they show that Europe is emerging from a long period of economic stagnation, but if the best real growth rate you can hope for over the next two years is 1.8%, your economy is in stagnation not really left behind. Breaking the shackles of stagnation requires sustained real annual growth of more than 2% over a sustained period.

It is understandable that Commissioner Gentiloni adopts a modest attitude when presenting the report. In doing so, he provides the public with more information than is contained in the economic statistics in his report. With more than his words, he signals that Europe really doesn’t have much to brag about or hope for when it comes to its economic future.

He’s right: in the report’s own numbers, there are no improvements in the economy for 2025 and 2026 that cannot be offset by even a moderate deterioration in some key variables.

With this in mind, however, it is worth noting that the projected modest improvements in the European economy over the next two years will actually materialize. The fall in inflation from 2.6% to 2.0% for the entire EU predicted in the Commission report will at least maintain real wages; A larger increase in household spending would result from an increase in consumer confidence.

In short, Commission Gentiloni can be confident that the modest GDP growth forecasts are very likely to materialize.

However, at this point the question inevitably arises: what needs to happen for the European economy to recover faster than the Commission forecast? Frankly, how far into the future can the EU economy survive without falling back into the quagmire of stagnation that it so desperately needs to leave behind?

The Commission’s outlook seems to express hope for an investment boom on the back of lower interest rates, which is probably an attempt to draw blood from a stone. If this were to happen, it would actually help the EU economy move into a period of stronger GDP growth. The problem is that there’s not much to hope for here; In general, for every 100 euros that companies spend on capital formation, about 90 euros are motivated by increased demand for their products.

The influence of interest rates on investments is, at best, restrictive in nature.

In the situation the EU finds itself in today, a concerted effort to deregulate the economy would most likely have a greater impact on business investment than any fall in interest rates. These deregulation efforts must focus on the numerous “environmental regulations” that ensnare businesses across the European continent. If it could also be extended to labor law, it would do wonders to improve the overall business climate and thereby strengthen incentives for investment.

As a comparative measure, regulations account for about €50 of every €100 a company pays in taxes. Of course, some regulations are more expensive than others, but in general there is great potential for improvements in the European business climate if only the relevant authorities would take this potential seriously.

An even stronger potential source of economic growth lies in reducing the size of government. Across the EU, government spending accounts for 40-50% of GDP, with taxes not far behind. At these levels, public sector spending has a significant impact on the forces that produce economic growth. For every ten percentage points by which this spending ratio increases above 40% of GDP, real GDP growth falls by at least one percentage point over time.

In other words,

• If the government spends 40-50% of GDP, real GDP growth falls from, say, 2% to 1% per year;
• If the government spends 50-60% of GDP, real GDP growth falls from, for example, 1% to 0% per year.

Other factors also influence GDP growth, including regulations, among others. Since this is another form of government intervention in the economy, it is fair to say that the government is the biggest culprit preventing the European economy from growing and generating more wealth.