Although renewed optimism seems to be arising in Europe, changes need to be made soon to prevent the region from falling into renewed financial turmoil, said Allianz chief economic adviser Mohamed El-Erian.
“A few things need to happen rather quickly – specifically, over the next several weeks and months – if the continent is to minimize the risk of slipping into another prolonged period of under-performance and additional asymmetrical downside financial risk,” former CEO of Pacific Investment Management Company (Pimco) wrote in a column for Project Syndicate.
Topping Europe’s critical ‘to-do list’ is the imminent geopolitical threat from the Russia-Ukraine crisis that may damage Europe’s economy, which is in no position to weather further disorderly tensions, El-Erian said.
“Further escalation would mostly likely cause the West to impose deeper economic and (critically) financial sanctions on Russia, followed by Russian counter-sanctions… All this would tip Europe as a whole into recession,” he added.
El-Erian also noted that the European Central Bank (ECB) should shift its focus from ‘financial-crisis prevention’ and develop growth supportive strategies. He added the central bank also needs to counter the euro’s “over-appreciation.” El-Erian’s comments come at an opportune time given that earlier this month, the ECB held its monthly policy meeting where President Mario Draghi shared his concerns of “protracted stagnation” and lower inflation in the EU.
The need for European politicians to show strong leadership, the role of individual countries within the EU as well as the importance of the European Parliament election taking place in May, El-Erian said are other factors that will be vital to ensuring Europe’s recovery.
Despite EU’s long task list, El-Erian said it is achievable.
“Progress on each [task] would help to ensure that Europe’s encouraging spring leads to a bountiful harvest of economic opportunity, growth, and jobs, while reducing the risk of a hot political summer and a more frigid economic winter.”