Better Prospects for Europe

10.07.17 Publication:

Business prospects in Europe are looking better than at any stage in the past decade. Opportunities for foreign investors look arguably the best in the developed world, better certainly than in either Donald Trump’s America or a Britain faced with all the difficulties of leaving the European Union.

This positive picture for Europe may be hard to believe, given the frequency of economic and political crises in the European Union in recent years. But it is true. There is every chance that Europe, especially western Europe, will outperform the rest of the developed world in the next few years both in terms of economic growth and of the implementation of economic reforms.

Already growth in the 19-country Eurozone is outpacing that in both the United States and in Britain. And so it should: the cyclical recovery from the recessions caused both by the 2008 financial collapse and the euro sovereign debt crisis has been slower to arrive in Europe than in the US. But now recovery is finally happening, helped by cheap international energy prices, and it is increasing in strength.

This economic revival is happening at a very helpful and fortunate time. The second biggest economy in Europe, France, has just elected as its president the 39-year-old reformer Emmanuel Macron. The sort of liberalizing reforms in labour markets and taxation that he envisages will be much easier to achieve in a growing economy than in a stagnant one. And the biggest economy in Europe, Germany, is also due to have an election in September, which is likely to re-elect Chancellor Angela Merkel for what is surely her final term in office, a chance to create for herself a positive historical legacy.

Chancellor Merkel has led Germany now for 12 years, and has played a crucial role in keeping the European Union stable, amid great divisions and major crises, including those caused by Russia’s military intervention in Ukraine, by the huge flow of refugees from wars in the Middle East and North Africa, and by the euro sovereign debt burdens in Greece, Spain, Ireland and Portugal.

In her final term in office, she will have the chance not just to maintain stability but to lead a more constructive, more positive Europe. Such a positive Europe would be impossible without a French counterpart such as President Macron who is strongly pro-European. But also it would be much harder if the European economy was not growing.

This combination of economic recovery and the presence in France and Germany of strong, reformist leaders who wish to co-operate with one another means that the European Union now has the best chance in many years to really rebuild itself, to revive its economies and societies, and to gain a greater voice in the world.

It is already clear that a major part of the new, positive agenda for European co-operation will be defence. Germany, France and other leading EU nations know they need to spend more on their own defence, given the dangers that surround Europe and the fact that President Trump’s America has become an unreliable ally in NATO. They also know, however, that to make their defence spending more effective and affordable they need to collaborate more with one another over arms procurement and military planning.

Another promising area on the agenda will be energy, through the construction of a full, Europe-wide smart electricity grid so as to facilitate investment in renewable energy. President Trump’s recent announcement that the US will withdraw from the Paris agreement on climate change has added to the incentive for this form of collaborative public investment.

The biggest reform efforts are likely to be domestic, especially in France. But to make those reforms politically acceptable, governments such as President Macron’s will want to maintain economic recovery and to provide an image of a constructive, positive role for the European Union.

This all promises to provide new opportunities for Japanese businesses in the European Union. For the past 12 months, many Japanese companies have been understandably preoccupied by Brexit, the abbreviated word for Britain’s withdrawal from the European Union that was initiated by the country’s referendum in June 2016. Having invested heavily in Britain over the past 30 years as a base from which to export into the rest of Europe, Japanese firms have found the prospect of Brexit highly disturbing.

Now, however, European economies are looking like better alternatives to Britain for Japanese investment. But also Britain’s general election on June 8th has cast serious doubt on whether Brexit will actually happen. With Britain now led by a fragile minority government and facing the prospect of new elections later this year, it has become likelier that even if Britain does leave the EU it will remain in the EU’s customs union and single market – which would be reassuring for Japanese investors.

So Europe now looks a better bet for investment, on both sides of the English Channel.