Europe faces an uncertain future

Recent Eurozone success masks underlying weaknesses

After trailing other major global markets for most of the decade, the European economy rebounded strongly last year, according to Experian’s latest forecasts. The expansion is likely to continue over the next two years, but beyond this, the outlook is not secure.

Progress will not be guaranteed unless there is a deepening of reforms or action to counteract demographic shortfalls in many parts of the continent. Performance is also set to remain very uneven, with hotspots located far from the traditional Franco-German core and, while cities play an important role in driving prosperity, proximity to a major business centre is no guarantee of success.

A turnaround in the fortunes of Germany has been instrumental in the Eurozone resurgence. Moreover, this year, even the consumer sector in the world’s third largest economy is expected to contribute again after a long slump. Improvements in Italy and France are less marked. More worrying, Germany leads a Eurozone slowdown after 2008, as structural problems re-emerge (high taxes and rigid labour markets) and demographics become less favourable. The larger Eurozone economies are expected to experience some of the EU’s most sluggish activity over the longer term.

Outside of the single currency area, prospects are healthier, with the UK and Scandinavia continuing to perform strongly. Meanwhile, new members in central and eastern Europe see GDP growing at twice the rate in the Eurozone. But much of this still reflects productivity catch-up, as the former communist economies modernise, and employment creation is considerably less impressive.

Experian has forecast the performance of 2,000 towns, cities and regions in Europe. These predictions show how uneven the distribution of economic success will be in future. Growth hotspots are mostly located on the fringes of the continent, such as in Ireland, Scandinavia, southern Britain and Spain, Greece and the accession nations. By contrast, the sluggish economies of some German regions (especially the east), Italy, northern France and Benelux have the least dynamic regions.

There is an increasingly strong link between growth in major cities and economic performance. These urban centres benefit from a good services-orientated industry base, have strong commercial and infrastructure links and attract inflows of highly skilled workers. In general, key centres see employment growth in excess of their national economies.

But the reasons for urban success vary. In western Europe, for instance, some of the faster growing cities are supported in large part by a strong national economic performance, most notably in Athens, Barcelona and Madrid. For others, the difference is explained by a superior ability to attract talent. In London, Stockholm, Munich and Oslo, for instance, population growth is far stronger than the trend in the wider economy.

Demographic weakness is a major influence at the other end of the scale. Italy has the worst population outlook in western Europe and it is no great surprise that its major cities perform poorly on job creation. Paris is a less obvious laggard, but here a steep fall in working age population reflects a continuing trend of decentralisation in the French economy.

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