Let the good times roll — but why they won’t in 2018

Political Economy is a column about the intersection of economics, finance and politics across Europe.

PARIS — How to make the best of good times is the most important economic question European governments will face in 2018.

That will not be as easy as it may sound. And to say the least, it’s not an issue that was at the top of the European agenda in the last 10 years: Those were spent dealing with successive crises, always belatedly and under urgent pressure.

The European recovery has defied forecasts. In the EU (which still includes the U.K., for now), GDP is likely to grow 2.3 percent in 2017. A year ago, it was projected to expand by only 1.6 percent.

The prospect of Brexit has already hurt the U.K. economy, but hasn’t made a dent on Europe as a whole. Continental economies have been boosted by the global recovery, reforms from the crisis years bearing fruit in fiscally challenged countries, and the perception that political risk was receding after populist parties’ defeats in countries such as France and the Netherlands.

However, Europe’s growth in 2017, strong as it is, will be just about what it was on average in the five years before the onset of the global financial crisis in 2007. And after five years of recovery, the law of economic cycles will at some point demand its due.

Growth is already seen as slowing down — from 2.4 percent in 2017 to about 1.7 percent in 2020 in the eurozone, the European Central Bank reckons. So now looks like the ideal time for governments to address their long-term economic problems, if they want to be better prepared for future downturns.

The prize for best cliché in this regard goes to European Commission President Jean-Claude Juncker, who keeps warning EU governments that they should enact reforms while “the sun is shining.” Juncker is speaking about eurozone reform, talk of which was given a new life at the urging of French President Emmanuel Macron.

But the formula has since been picked up by EU officials and even in EU documents to express the concern that governments might lack incentives to keep doing “whatever it takes” — to borrow from Mario Draghi in another context — to put their economies in order.

Governments, however, should have many reasons not to fall back into complacency.

Germany will have one of Europe’s fastest-growing economies in 2018, and it could use its massive influx of refugees to address the long-term structural problems it is beginning to discuss, if not act on. The demographics of a fast-aging population is an obvious one, which could in turn focus the minds of policymakers on the lack of public investment in many areas — think bridges or the digital economy.

France may benefit for the moment from the aura of its young new president in the eyes of international investors. But French unemployment will remain stable or barely decline, according to most forecasts, and Macron still has to show how he intends to attack the country’s entrenched interests and open large sectors of the economy to serious competition. Furthermore, the country’s persistent budget deficit, even after five years of positive growth, showcases deep-seated problems that the Macron administration has so far failed to address.

Italy is pulled up by the rest of Europe for now, but its over-indebted government looks incapable of enacting growth-friendly policies, and its political future following parliamentary elections in the first part of 2018 remains uncertain.

Meanwhile, the U.K. has now joined Italy in the “sick man of Europe” category — with growth in both countries seen at around 1.3 percent in 2018, against 2.3 percent for the EU as a whole. The British economy has been hit by the Brexit referendum, to the tune of around £300 million a week. But the country’s stagnating productivity predates the June 2016 vote, and this is its most serious long-term economic problem — which must be addressed regardless of what happens in March 2019 and beyond.

Temptation to procrastinate

It is a long-standing belief of some European politicians that no problem can outlast an absence of solution. No one is immune to the temptation to procrastinate.

And the risk of the on/off discussion on eurozone reforms, which are scheduled to pick up once a German government is formed, is that it will serve as an excuse for governments to abstain from pursuing domestic policies that make sense. Many will pretend that a comprehensive reform is now the only remaining thing that separates the eurozone from years of lasting prosperity.

Yet it would make sense for France to build up fiscal buffers that could be used next time a recession hits the global economy without pushing the country even further into debt.

It would make sense for Germany to invest more massively for the proper integration of millions of refugees.

It would make sense for Italy to speed up the cleaning up of its banking system.

It would make sense for Spain to focus more resolutely on youth unemployment, and overhaul its education and professional training systems.

And it would make sense for countries like Poland and Hungary — carried by their remarkable growth rates of around 4 percent — to stop worrying the foreign investors they depend on with their reckless anti-European politics.

It would make sense for all of this to happen. But the European reality is that barring a major international crisis, governments won’t have pressing incentives to make it happen in 2018.

Pierre Briançon is chief European economics correspondent for POLITICO.