As the European Commission looks to strengthen its economic and political clout in a coming year, the EU’s economic future in 2018 could well be grim.
As EU leaders prepare to begin their new term, a new report from the International Monetary Fund has predicted the eurozone economy could contract by 0.7 per cent in 2018, according to a report by the European Council on Foreign Relations.
That would be the largest contraction since the financial crisis.
The report said the EU would struggle to maintain its current growth trajectory unless its leaders act fast to reduce debt levels and strengthen competitiveness.
The outlook for 2018 is also gloomy.
The IMF’s 2017 forecast of a 1.4 per cent contraction in the euro zone in 2018 was cut by one per cent by the EU as the bloc struggled to cope with the fallout from the Brexit vote, according the report.
But it warned that “significant vulnerabilities remain” in the union’s competitiveness and that the economy would need to continue to grow “at least” 6.5 per cent per year to maintain the EUs current growth rate of 6.2 per cent.
The European Commission, which has been pushing for a more liberal EU, wants to speed up the adoption of new laws to address the impact of Brexit, boost growth and boost public services.
But the report warns that, if governments fail to act on the agenda, the bloc could experience a deep recession, with economic growth falling by more than 2 per cent a year.
“A prolonged recession would have dire consequences for the EU economy, with a reduction in gross domestic product of 2.5 percentage points per year by 2020, which would put the EU in a position of significant financial distress,” the report said.
“This would require the EU to seek additional financing to stabilise its financial position and, by extension, its economy, and would likely require significant structural and policy changes to be implemented.”
It said if the eurozone continued to suffer the economic fallout from Brexit, it would likely be even worse off.
The crisis has created a “muddle of conflicting priorities and conflicting visions” in Brussels, the report warned.
The EU needs to take more proactive measures to respond to the effects of Brexit on the EU, such as a more robust migration policy, a more comprehensive approach to climate change and a wider focus on jobs, the IMF said.
Its report also criticised European countries for failing to fully implement reforms that would make it easier for companies to relocate to the EU.
It said there are “serious concerns” about the effectiveness of the current system of free movement in the eurozone, which allows companies to operate in the bloc as long as they pay tax and register in a country where they have an annual turnover of less than 10 per cent of GDP.
The OECD warned that, without reforms, it was “highly unlikely” that the EU could attract foreign direct investment and attract talented employees, adding that the bloc “will face significant challenges in attracting and retaining skilled workers”.”EU countries should take urgent action to address these challenges and to increase the effectiveness and efficiency of the EU migration system and strengthen labour market competition,” the OECD said.
In its own report, the European Parliament’s Economic Affairs Committee warned of the “urgent need” to address economic uncertainty and migration pressures in the economy.
The committee, which is headed by Greens party MEP Katja Kipping, said the report’s findings could have “huge consequences” for the next three years.
“The report makes clear that the challenges to the economy are far from over,” it said.