2024 in Review: achievements, challenges and what iies ahead for Europe
Friday, 27 December 2024
From sluggish growth in the eurozone to Spain’s unexpected economic dynamism and the looming impact of Donald Trump’s return to the White House, 2024 has been a year of profound lessons for the European Union. What do these developments mean for 2025 and beyond? In a recent Future is Blue podcast episode, I had the opportunity to discuss these issues with Raymond Torres, Director of Funcas Europe.
You can listen to the episode here.
A temporary shock or chronic disease?
The eurozone’s economic performance in 2024 has been disappointing. Growth has been slow, investment weak, and inflation, while easing, continues to weigh on consumers. So, is this a temporary hurdle or a sign of deeper structural issues?
According to Torres, “There is a bit of both. Inflation has eroded purchasing power, leading to slower consumption growth. As inflation slows, we might see some recovery, but the real issue is structural.” He identifies two main factors: Europe’s energy transition and the changing nature of global trade.
The ongoing fallout from the war in Ukraine has underscored Europe’s energy vulnerabilities, particularly for energy-intensive industries. As the EU seeks to wean itself off Russian energy supplies, higher costs and disruptions have persisted, weighing on industrial output. At the same time, global trade has become increasingly fragmented, with multilateral rules giving way to geopolitical considerations. “For an economy as trade-dependent as Europe’s, these shifts are deeply challenging,” Torres notes.
The cumulative impact of these structural challenges goes beyond short-term adjustments. “We are seeing long-term changes in the global economic order, and Europe must decide how it positions itself amid these shifts,” he added. This necessitates a combination of immediate action and long-term strategic planning.
Spain: A bright spot in a dim year
Amid these challenges, Spain has emerged as a surprising success story. While major economies like Germany and France have struggled, Spain’s resilience has been notable. Torres points to three key factors driving this performance.
First, Spain’s competitive position has improved significantly. Electricity prices are 27% cheaper than the European average, thanks to investments in renewable energy Torres. This has made Spain an attractive destination for foreign investment, particularly in sectors like manufacturing and few technology services.
Second, immigration has played a crucial role in revitalizing the labor market. “More than 80% of Spain’s population growth in the past couple of years is due to immigration,” Torres notes. This influx of foreign workers has helped address labor shortages in key sectors like hospitality and construction, providing a significant boost to economic activity.
Lastly, strong public consumption has provided a short-term boost to growth. However, this level of public spending is not sustainable in the long run. “We need to transition from consumption-driven growth to investment-driven growth,” he notes. And fiscal adjustment has to play its part.
Despite these positives, Spain is not without major challenges. Private investment remains weak, mirroring a broader European trend. Without stronger investment, Spain risks missing the opportunity to solidify its economic gains. Productivity growth remains sluggish as well, human capital deficits are significant and unemployment, while on a downward trend, is the highest in Europe.
Trump’s comeback and emerging transatlantic tensions
On the global stage, Donald Trump’s return to the White House has reignited concerns about trade tensions between the US and Europe. During his first term, Trump targeted Europe with tariffs on industries like steel and aluminium, and his second term could bring even broader protectionist measures.
The EU’s trade surplus with the US makes it an easy target for Trump’s trade policies. This creates uncertainty, particularly for export-driven sectors such as automotive and aerospace, which could face increased tariffs. Beyond direct trade impacts, the anticipated fiscal policies of the new US administration—such as tax cuts and immigration restrictions—could have inflationary effects, influencing global financial markets.
Europe’s heavy reliance on open trade leaves it vulnerable to such shifts. “This is a wake-up call for Europe to reduce its dependencies and strengthen its internal market”.
Adding to this, the potential fiscal turbulence in the US could affect global monetary policy. “US policy influences the entire global financial system,” Torres notes, warning that Europe must prepare for potential ripple effects on interest rates.
Any opportunities in this adverse scenario?
Despite the significant challenges, there are areas where Europe can adapt and even thrive:
Deepening EU integration: Strengthening the single market through initiatives like the Capital Markets Union and deeper financial integration could help Europe unlock new growth opportunities. “There’s still untapped potential within the EU itself,” Torres notes. Simplifying regulations, lifting bureaucratic hurdles and fostering innovation are critical steps toward achieving this.
Investing in public goods: Europe must ramp up public investment in areas like defense, green energy, and technology. The recent Draghi report highlighted the need for significant annual investments to counter Europe’s economic stagnation. Torres suggests that “pan-European investment programs could address critical gaps while boosting the EU’s strategic autonomy.”
Diversifying trade relations: While the US and China dominate global trade, Europe has opportunities to build stronger ties with emerging markets in Latin America, Asia, and Africa.
Looking ahead to 2025
Policymakers face a delicate balancing act. Inflation is expected to ease, offering a potential boost to consumer spending. High household savings could also translate into stronger consumption if confidence improves. However, structural challenges such as weak private investment and fragmented markets will require sustained attention.
Germany’s potential reform of its debt brake—a measure that has constrained fiscal spending—could open the door for increased public investment in Europe’s largest economy. This, combined with broader EU initiatives, could lay the groundwork for a more resilient European economy.
“2024 has shown us that the world has changed, and Europe needs to adapt. Continued fragmentation, including through the proliferation of State aid which undermines the internal with little overall effect, would be a risky path. The challenges are significant, but so are the opportunities”, remarks Torres.
As the EU enters a new political cycle, decisive action will be essential to address its vulnerabilities and seize the opportunities of a changing global landscape. Whether it’s through deeper integration, strategic investment, or more robust trade diversification, Europe has the tools to chart a path toward greater resilience and competitiveness. The question is whether it will act swiftly enough to use them.
You can listen to the episode here.
Carlos Carnicero Urabayen