EUROPE IN 2015

Entering 2015, Europe faces a number of new challenges from both within and abroad. Popular discontent with austerity is growing and fueling rejectionist political movements, and with a number of elections on the calendar including in Greece, Spain, Portugal, and the U.K.there will be ample opportunity for voters to express their displeasure.

In this regard, Greece is once again in the vanguard. The odds are rising that early elections could bring to power the opposition Syrisa party, whose platform, a comprehensive debt restructuring, a reversal of structural reforms, and fiscal expansion, would put Greece on a collision course with the rest of Europe.

At the same time, the standoff with Russia, combined with soft growth in much of the rest of world, means that external demand cannot be counted on to drive growth, which in turn limits the benefits from a weaker euro. A sharp decline in Russian GDP by at least 5 percent and reduced investment and trade flows have clearly affected sentiment in the region. Receding hopes for a trade agreement with the United States (the proposed U.S.-EU Transatlantic Trade and Investment Partnership or TTIP) could further dampen optimism.

To restart growth, Europe needs an approach that includes easier monetary policy, fiscal and structural reforms, and continued efforts to strengthen bank balance sheets. For its part, the ECB looks to be moving slowly toward adopting a program of sovereign-bond purchases (like the U.S. Fed’s quantitative easing) that would boost its balance sheet by $1 billion in order to stimulate demand.

Finally, countries must implement long-overdue fiscal and structural reforms in the tax and labor realms. Without more assertive action in 2015, Europe will continue to disappoint its citizens and the crisis could return.