The European economy will experience difficult years if the new forecasts prove correct.
Although the European Central Bank (ECB) cut interest rates for the third consecutive time on Thursday, saying the decline in inflation was “on track”, the outlook for growth is less rosy.
“The element that has changed is the downside risks, in particular the downside risk on growth,” said ECB President Christine Lagarde, announcing a further cut in interest rates in the euro zone, at 3%.
The bank said surveys indicated growth was slowing in the current quarter and the recovery depended on more consumer spending and increased business investment.
He lowered his growth forecast for the euro zone economy next year to 1.1%, from 1.3% forecast in September.
And these forecasts do not include the impact of Trump's tariffs on trade that looms on the horizon after the inauguration of the US president-elect in January.
Markets are now pricing in a series of faster rate cuts next year.
The main challenge in the short term is that the two engines of the eurozone are not starting.
Germany is facing a structural challenge that weighs on its entire economic model. High energy prices, higher labor costs, the need to shoulder more of the defense burden, and the complications of its dependence on exporting capital goods to China have undermined all the pillars of its growth and its export miracle. Its totemic auto industry now faces significant competition from China's advances in battery power.
France has been more successful economically, but President Emmanuel Macron's reforms have divided the French electorate into three hard-to-reconcile blocs that have made the nation difficult to govern.
The upcoming German federal elections could bring about a decisive change. Or could Germany's economic challenge be complemented by an ungovernable French-style political impasse?
There are brighter spots in Europe.
Spain could be the world's fastest-growing advanced economy, rivaling even the United States, thanks to a tourism boom, broad access to workers and green investment.
The crisis countries of the 2010s – Portugal, Ireland, Greece and Spain – are now the best performers in the euro zone. The so-called “PIGS” fly.
But there is a broader canvas here. The structural underperformance of the European economy in the face of a booming, technology-driven, cheap energy-powered United States requires tough policy decisions.
Much of this was highlighted quite starkly in the report by former Italian Prime Minister and ECB President Mario Draghi, who said the EU would face an “existential challenge” unless it does not considerably increase its investments or reform its industrial policy.
There is no indication that major European governments have the political capital to undertake these reforms. And all this is happening before the arrival of a US president who wants to take action against jurisdictions that he says are “ripping off” the United States, including the European Union.
The stakes are high for Europe in the coming months.
