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  March 1st, 2017 | Written by

Uncertainty Ahead for EU Economy

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  • Future growth forecasts for the EU economy are much improved.
  • Analysts predict the euro will fall sharply against the US dollar in 2017.
  • A surging dollar is good for EU trade.

Prior to the US presidential election, growth forecasts for the EU economy were tempered by recurring problems within the European economic zone, namely negative interest rates, a weak dollar, and deflation. 2016 proved to be a turning point. President Trump was elected in the US and the British people voted for Brexit, which will see the UK trigger Article 50 in the next month.

Not surprisingly, this has had a marked effect on the EU economy, with future growth forecasts much improved. According to data from Oanda, we are seeing rising inflation and a stronger euro right now. In May last year, the euro was trading at 0.865 against the dollar, but it is now trading around the 0.94 mark. Unfortunately, this short-term recovery may not last.

A Turbulent Year Ahead for the Euro
2017 looks likely to be a turbulent year for the euro. With a slew of elections ahead, the prospect of victory for a National Front candidate in France’s forthcoming election has sparked fears of black clouds ahead for the euro. Political support for the euro is fading and analysts predict the euro to fall sharply against the USD in 2017. Rising interest rates in the US combined with strong economic data has strengthened the USD’s performance against the euro, but with Trump’s policies still unclear, there is every chance there will be further trials and tribulations in the Euro/USD.

Rising Inflation in the Eurozone
Inflation is rising in the eurozone, but the last quarter of 2016 saw strong economic growth. The European Commission predicts growth of 1.6 percent within the euro area, and 1.8 percent within the EU as a whole. The election of President Trump has stimulated the US economy. The Federal Reserve has indicated it may raise interest rates to counter rising inflationary pressures in the US, but this is unlikely to hinder the appreciation of the USD.
Exports were weak in 2016, but a surging dollar is good for EU trade, so exports of goods and services are expected to receive a boost in 2017. There is also increasing demand from emerging markets, which is good news for EU export businesses.

EU Exports See Strong Growth
Statistics published by Eurostat indicate that intra-EU exports are rising year on year. In 2002, the value of EU exports to other member states was 1.908 billion euros. By 2015, this figure had risen to 3.063 billion Euros. For 12 of the EU members, the value of intra-EU exports grew by 100 percent, but many of the newest members saw growth of more than 200 percent.

The majority of trade in the EU is between EU members. Most countries conduct most of their trade with their closest neighbors. Germany is the biggest trading partner of all EU nations, with the exception of Cyprus. The United Kingdom is the only country with significant trade agreements outside the EU. Manufactured products represent the largest group of exported goods, which include cars, machinery and chemicals. Food, energy and raw materials make up the rest of intra and extra-EU exports.

With so much political strife on the cards, there are uncertain times ahead for the eurozone, but in the short-term at least, EU exports look set to enjoy a period of growth following a poor 2016.

Marcus Turner Jones graduated in economics from the University of Sheffield before working in London and Madrid. His particular area of expertise are the Latin American markets. He currently lives in Buenos Aires as a freelance writer and investor, with his dog, Luna.