The most recent data shows that the euro-zone economy is currently in a period of strong expansion. With economic growth of nearly 2 percent, two million new jobs and falling – although still high – unemployment of 9.2 percent, 2017 could well be the bloc’s best year since the financial crisis. The upward trend applies to all the countries in the currency union and is increasingly driven by domestic demand, making it more stable.
Of course, it is questionable how long the upswing will last. A great deal will depend on developments in the United States and China, because there are risks for the euro zone in both of these economic regions. There could be a slowdown in Europe too, for example, if Brexit negotiations fail or old debt problems of certain southern European countries become acute again. None of this is predictable – all of it is possible. And economic policy is not well prepared for such risks.
In many countries, finance ministers have little scope for expansive measures because sovereign debt has continued to increase in recent years. And as the interest rates of the European Central Bank are still below zero, monetary policy could only intervene with unconventional measures, the effects of which are highly questionable.
That is why it would now be a good idea to make anticyclical adjustments to economic policy and remove existing economic stimuli. The euro-zone member countries should use cyclical tax windfalls, which we have had in Germany for years, to reduce their budget deficits and not succumb to the political temptation of increasing expenditure.