Will Europe Be the Key to our Economic Revival?

Marking an end to the longest European recession since World War II, economic output in Europe—specifically in the Eurozone countries—grew last quarter at an annualized rate of 1.2 percent after falling for six consecutive quarters. Additionally, while unemployment remains high (over 25 percent in some regions), the number of jobless Europeans decreased in June for the first time in over two years. After enduring the financial meltdown in Greece, the collapse of the economy in Cyprus, and the bailouts of Ireland and Portugal, Europe is finally enjoying a period of relative economic calm. The approximation of steady state achieved in recent months has eased fears and improved consumer confidence throughout the region. In terms of global economic impact, a rising tide out of Europe—even a small one—raises all ships.

Significant challenges remain, however, including chronic unemployment and underemployment of young workers, the threat and impact of considerable austerity measures, and enervating debt in several key countries. For instance, the debt-to-GDP ratio for the Eurozone has swelled to 92.2 percent from 70.1 percent in 2008, and Greece and Portugal have debt-to-GDP ratios well over 100 percent. A number of European countries are struggling to compete economically, particularly as labor costs have increased despite modest or flat productivity gains.

In spite of these challenges, ongoing European economic stabilization could lead to a point of inflection for the steady but sluggish American economic recovery. Why? Because Europe comprises such a significant portion of U.S. trade. About one-sixth of total U.S. exports are sent to Europe. The U.S. and Europe trade approximately $1 trillion in goods and services in total each year, making Europe by far our largest trading partner. Moreover, that trade supports about 13 million jobs in the U.S. and Europe combined.

While the current trajectory suggests that Europe’s economy is positioned to continue improving, proactive efforts from U.S. and European leaders could kick start both regions’ economies through policy reform. In early August, President Obama and European leaders began negotiating a U.S.-European Union free trade agreement. Slated to go into effect by the end of 2014, this pact has real potential to accelerate growth, promote innovation and competition among businesses, increase demand for goods from both regions, and decrease unemployment. Early projections from the Centre for Economic Policy Research in London forecast that this agreement will lead to the creation of nearly 2 million new jobs, which would add $160 billion to annual European income, and $125 billion to U.S. income.

Credit should be given to leaders on both sides of the Atlantic for recognizing the opportunity to engender a net positive economic outcome across the board via a shift in policy. Understandably, an agreement of this scope and magnitude will face many hurdles. For instance, several European countries worry that a free trade pact has the potential to pave the way for U.S. culture to overrun their way of life. Additionally, Europeans have checked their enthusiasm in light of Edward Snowden’s revelations about the U.S. National Security Agency programs. Ultimately, from a domestic perspective, the U.S. economy is expected to progress steadily in the coming months and years, but an improved European economy—galvanized by this potentially-historic free trade agreement—could spur our economy from simply recovering to thriving.

This post is part of an ongoing series of data-driven commentary on current events. It was originally published in the Zion’s Bank Economic Outlook Newsletter and the Deseret News.