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Europe cuts 2024 growth outlook, ECB’s Lagarde calls for revamp of German model

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The European Commission cut its growth outlook for both Europe and the eurozone on Thursday (15 February), revising it down from its autumn projection amid persistent geopolitical headwinds and stubborn economic headaches in Germany.

GDP for the 27-member bloc is now expected to grow 0.9%, down from a 1.3% projection in the previous Commission forecast, while eurozone countries are seen posting a 0.8% increase, down from the previous 1.2% forecast.

The lacklustre forecast comes just one day after Germany, the bloc’s largest economy and industrial engine, signalled it will slash its 2024 growth outlook to 0.2%, from previous government expectations of 1.3%, with Economic Minister Robert Habeck (Greens) dubbing the German economic performance “dramatically bad”.

The Commission’s own forecast for Germany – at a meagre 0.3% from the autumn forecast of 0.8% –  confirms dim GDP prospects for the country, positioning it as the eurozone’s worst performer for the second consecutive year.

Within the 20-member euro bloc, the Netherlands follows suit with a 0.4% projection, slumping from the previous 1.6% expectation, while overall, Sweden fares as Europe’s laggard with 0.2% projected growth – also a significant downgrade from the previous 1.6% forecast.

The EU executive also posted downward revisions for the continent’s second and third largest economies, France and Italy – lowering their GDP growth outlook to 0.9% and 0.7% respectively, from 1.3% and 1.2% in autumn – further corroborating that “following subdued growth last year, the EU economy has entered 2024 on a weaker footing than expected.”

Lagarde calls for deep rethink of European models amid German headaches

Commenting on the precarious German trajectory, the European Central Bank President Christine Lagarde warned that the country’s economic model may need a radical overhaul.

“It’s obvious that the business model on which [Germany] has developed its economy needs to be revamped and probably restructured,” Lagarde told MEPs on the European Parliament’s Economic Committee on Thursday.

“I think that on the issue of competitiveness in particular, all countries, Germany included, have to work on the energy mix on which they operate and they have to increase their energy independence,” she said.

Energy-intensive sectors are in fact among the hardest hit by the geopolitical issues affecting the bloc’s economy since the start of the Ukrainian conflict – a particularly problematic long-term factor for the manufacturing-heavy German economy.

At the Commission’s forecast press conference this morning, Economic Commissioner Paolo Gentiloni also cited the Russia-Ukraine war, as well as unrelenting tensions in Gaza, as significant drivers of uncertainty.

“The future economic outlook is unfortunately subject to high uncertainty, not least owing to Russia’s ongoing war against Ukraine and the rising tensions in the Middle East,” he said.

“Yet it is in our power, and it is our responsibility, to support sustained and sustainable growth. The effective implementation of national recovery and resilience plans is a key priority,” he added.

Gentiloni sees role for ‘investment-friendly’ policies

At present, the post-pandemic EU Recovery and Resilience Plan (RRP) indeed represents a key positive catalyst for some of the bloc’s economic recovery – including for the two outperformers of today’s growth forecast – Greece and Spain – for which the facility currently contributes funding equivalent to as much as 16.7% and 5.8% of national GDP respectively, according to official EU data.

Greece was the only euro member to hold its position today compared to the previous Commission forecast – confirmed at a 2.3% growth rate for the year, while Spain grabbed the second spot with a 1.7% projection, revised from 2% forecast earlier.

Overall, Commissioner Gentiloni backed a continued role for “investment-friendly” policies in improving the bloc’s economic prospects.

“A close coordination between prudent investment-friendly fiscal and monetary policies should be pursued to support the ongoing efforts to keep inflation at low level,” he added.

On the inflation front, numbers have improved faster than expected – thanks mostly to declining energy prices and subdued growth – with a projected 3% annual rate for the bloc and 2.7% for the euro area, down from the previous forecast of 3.5% and 3.2% respectively.

(Additional reporting by Thomas Moller-Nielsen, Olivia Gyapong)

[Edited by Zoran Radosavljevic]

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