Economic and Budgetary Outlook for the European Union 2019

Written by Alessandro D’Alfonso, Angelos Delivorias, Magdalena Sapała, Marcin Szczepanski, Ioannis Zachariadis.

Graphics by Giulio Sabbati.

Outlook map
© European Union, 2019

In 2018, the EU and euro-area economies continued their
moderate growth (2.1 %). This growth was based on domestic private and
public consumption and on strong investment – itself stemming from low interest
rates and high business confidence, which is, however, likely to deteriorate slightly
going forward. It was also underpinned by the creation of jobs: unemployment is
currently at a post‑crisis low and labour market conditions are expected to
continue improving over the next two years, albeit more moderately than

The global outlook in which this growth is taking place,
however, is less promising than it was a year ago. Indeed, for the first time
in almost 30 years, the expansion of trade liberalisation came to a halt in
2018. World merchandise trade volumes grew less in 2018 than in the previous
year, and are expected to decrease further in the near future, especially in the
event of an escalation in current trade tensions. Partly as a result of the
above, EU exports were subdued and are projected to remain so in the near
future. In addition to the above, specific risks revolving around private and
public finances, financial markets, monetary policies and trade, as well as the
gloomier forecast for key emerging economies, such as Argentina, Brazil, Iran,
Turkey, Venezuela or South Africa are signs that global expansion has peaked
(3.7 %) in 2018, and should begin to decelerate in 2019 and 2020 (3.5 %).
In this context, the EU and euro area is expected to continue growing, but at
an even lower pace over the next two years (between 1.8 % and 1.9 %).

In this context, while the European Central Bank reduced its
purchases under the purchase programmes significantly in 2018, and decided to
end them by December, it decided to continue reinvesting the principal payments
from maturing securities purchased under those programmes and to keep using its
forward guidance. The aforementioned trends, the different pace of monetary
policy normalisation in the United States and the United Kingdom on one hand
and in the euro area on the other, trade tensions in world markets, but also
specific fiscal issues relating to particular Member States, resulted in a
mixed picture compared with last year, with the euro appreciating slightly
versus emerging market currencies, while at the same time weakening versus the
dollar, the yen and the pound sterling.

Following the now established pattern, the study delves into
two of the tools and initiatives that European institutions use to contribute
to the European response to the aforementioned developments: the European Union
budget and the way it is designed to tackle challenges, and EU initiatives
aimed at supporting small and medium-sized enterprises (SMEs).

The 2019 EU budget amounts to €165.8 billion, representing
only 2 % of total public spending in the European Union – approximately 1 %
of gross national income (GNI). Despite its volume, the overall impact of the
EU budget is amplified by a number of features, including: a higher share of
resources devoted to investment than in national budgets; the capacity to
leverage additional funding from other sources; and attention to policy areas
where the pooling of resources can provide the EU as a whole with added value
(e.g. research, innovation and development cooperation).

Agreed by the European Parliament and the Council of the
European Union, the 2019 budget focuses on priorities such as stimulating
investment, growth and research, creating new jobs, especially for young
people, as well as addressing migration and security challenges. In 2019, for
the fifth year in a row, the budgetary authority had to have recourse to the
flexibility provisions available under the EU’s 2014-2020 multiannual financial
framework (MFF) in order to finance these persistent policy challenges.

In 2019, the shaping of the next MFF, which should cover the
2021 to 2027 period, is expected to gain momentum. EU institutions and Member
States are working on the proposals put forward by the Commission in 2018,
which include a number of modifications to the way the EU budget is currently
financed and spent. Taking into account the expected withdrawal of the UK from
the EU, the proposed allocations for 27 Member States are organised around a
new structure reinforcing priorities that emerged during the current MFF, such
as research, innovation, digital transformation, climate action, borders,
migration, security and defence. The objective is to reach an agreement in
autumn 2019, but the start of a new political cycle for several key EU
institutions might pose a challenge for this.

The EU budget devotes particular attention to SMEs,
supporting them across a wide range of programmes and instruments. SMEs are
crucial to European economy since they constitute 99.8 % of all
non-financial enterprises in Europe. In 2017, these firms employed close to 95
million people which means that two out of three workers in the EU had a job in
this sector. Furthermore, European SMEs generated around €4.16 trillion,
amounting to 57 % of total added value. European SMEs were badly affected
by the economic and financial crisis starting in 2008 and only since 2014 have employment
and value added been increasing. The recovery is also manifested in the fact
that between 2008 and 2017, gross value added generated by SMEs increased
cumulatively by 14.3 % and employment in these companies increased by 2.5 %.
Value added and employment are also expected to grow in 2019.

Sustaining the continued growth of European SMEs relies, not least, on ensuring sufficient access to external finance – an area where they are typically considered to be at a disadvantage relative to larger firms. However, recent evidence indicates that the environment for their access to financing is gradually improving across the EU. In 2018, only 7 % of SMEs reported ‘access to finance’, as their most serious concern. This is a notable improvement when compared with the 17 % reported in 2009. Notwithstanding this positive development, traditional debt finance – whether in the form of credit lines, overdrafts, trade credit or standard bank loans – continues to be the primary source of external funding for the majority of SMEs, with alternative financing instruments remaining among the least preferred options. The heavy reliance on debt finance that has traditionally characterised European SMEs contributed heavily to their increased vulnerability during the recent economic downturn. In view of the persistent challenges, public attention is increasingly drawn to the potential of capital markets to offer alternative sources of financing for SMEs. As such, diversification of sources of funding through the development of deeper and more integrated capital markets is gaining increasing traction. Providing companies, especially smaller ones, with a broader choice of market-based funding at a lower cost, can help stimulate investment, thereby promoting sustainable economic growth and job creation.

Read the complete study on ‘Economic and Budgetary Outlook for the European Union 2019‘ in the Think Tank pages of the European Parliament.

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