Eurozone: New growth paths after export peak – ING

ING economists Bert Colijn and Carsten Brzeski argue that the Eurozone’s long-standing export-led growth model is being structurally eroded by higher energy costs, rising Chinese competition and a changing global trade environment. They outline four stylised scenarios for future growth, stressing that Europe’s success will hinge on productivity, cheaper energy, deeper capital markets and credible structural reforms.

Four scenarios for Eurozone growth

"This is what makes today's competitiveness debate different from earlier ones. While the war in the Middle East and US tariffs have dominated headlines over the past year, they are only one part of the story. The larger challenge is that the external environment on which Europe's growth model relied has changed fundamentally."

"To illustrate this, we define four stylised scenarios for the eurozone as it grapples with the erosion of its old growth model. In these scenarios, the key uncertainty is not whether Europe becomes more dependent on domestic demand or continues to rely on exports. It is whether Europe can generate sufficient productivity growth and new competitive advantages to support either model."

"In any case, both outcomes require the same clear but also disruptive policy choices, in order to achieve productivity growth, cheaper energy, deeper capital markets and reforms that survive contact with national politics. In fact, Europe won’t need to choose a new business model upfront, it simply needs to do its homework and then step back to see which model will prevail."

"Europe deliberately shifts away from dependence on external demand and develops a stronger internal growth model. Initiatives to strengthen domestic demand through public and private investment succeed. A more aggressive shift towards renewables and nuclear power reduces energy dependence significantly, and structural reforms unlock activity."

"Exports lose momentum and trade surpluses disappear, but Europe fails to generate sufficient domestic dynamism to compensate. Higher commodity prices weigh on purchasing power and ageing and weak productivity dominate. As European exporters lose market share and exports cease to be the main growth driver, the European growth model does indeed become more balanced – but it is a balance of the race-to-the-bottom kind."