What are Europe's Top Three Challenges

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No matter where we look, Europe continues to struggle to push higher. In terms of the vaccination campaigns, the union is clearly falling behind because too few vaccines were ordered too late. EU was slow to order the BioNTech-Pfizer vaccine, even when it became the frontrunner and its efficacy had been proven.


As a result, Europe continues to suffer from new lockdowns. In particular, France and Poland have once again reintroduced partial closures as new cases increased. Chancellor Angela Merkel said last week that the country would have to apply an “emergency brake” to reverse some recent relaxations of restrictions as coronavirus infections accelerate. Thus, Germany itself could face a return to stricter lockdown measures by Easter.

In this context, it should not be a surprise that the Commission expects the rebound to be concentrated in the latter quarter of 2021. Meanwhile, several European countries are on track to match or surpass historical highs in terms of public debt. To be more precise, six eurozone member states have ratios well more than 100%. On the one hand, if interest expenditure remains low, elevated public debt can be sustained. The problem will emerge if the sudden tightening of financial conditions and unexpected shocks will take place.

A substantial increase in financing costs could easily destabilize the situation, question the financial stability of the whole union. For that reason, markets shouldn´t expect a fast change in asset purchases under the PEPP. In other words, the expansive policy will continue until at least the end of March 2022.

However, if eventually, the ECB decides to decrease its balance sheet, serious problems can emerge. As a result, credible fiscal consolidation strategies across the most highly indebted member states will be needed. In the case they fail to agree on adjustments, the EU could face another sovereign debt crisis.

Additionally, Europe could suffer from further weakening in the currency of its trade partners, including Turkey. If Lira continues to decrease, Turkey´s ability to repay loans to European banks will be limited as well as an appetite for European products.

As the European Central Bank (ECB) Chief Economist Phillip Lane said, “It is an important issue for European policymakers to reflect upon — how to calibrate the European fiscal response and to make sure it’s sufficient to get through this pandemic.”


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