EU economy falls again, Germany remains eurozone’s problem child

FRANKFURT, Germany: Europe’s economy is growing, but at a moderate pace compared to the US

In the second quarter, eurozone GDP grew by 0.3 percent, while the US economy grew by 0.7 percent.

This growth gap highlights the challenges facing Europe, especially Germany, the region’s largest economy, which recorded a small decline of 0.1 percent.

The United States is enjoying strong consumer spending and significant government support, such as subsidies for business investment under the Inflation Reduction Act. In contrast, European consumers are saving at record levels, and governments are tightening budgets to reduce deficits.

“The higher U.S. performance is largely due to strong private consumption and domestic investment,” said Thomas Obst, senior economist at the German Economic Institute in Cologne. “Fiscal support was higher in the U.S. than in other advanced economies, with overall spending accounting for 25 percent of GDP.” Meanwhile, higher interest rates had less of an impact on credit and the economy than in Europe, he said.

Europe is still recovering from recent economic shocks, including inflation and rising energy prices. These problems have made consumers cautious, leading to high savings rates and reduced spending. The pandemic’s economic measures, which helped Europe avoid mass layoffs, have also slowed the economy’s ability to adapt and grow.

Economic growth is further hampered by structural issues such as high taxes and strict regulations, especially in Germany, where complex permitting processes and a lack of skilled labour are major challenges.

Even though inflation has fallen to 2.5 percent, high interest rates are weakening the construction and real estate sectors. Car sales, although up 4.3 percent in the first half of the year, are still 18 percent lower than before the pandemic. European consumers remain cautious, with high savings rates and low confidence in making large purchases.

Longer-term factors, such as higher taxes and burdensome regulations, are also holding back Europe’s growth. Economist Salomon Fiedler suggests that to catch up with the US, the eurozone needs to boost productivity and investment in productive capital. But the current economic climate and policies suggest that achieving that goal may be difficult.

In Germany, the need for faster approval processes for infrastructure projects and a focus on developing a skilled workforce are essential steps to improve economic performance. As Europe grapples with these headwinds, the region’s ability to close the growth gap with the U.S. remains uncertain.