Issue 3, 2014. June-July



Grant Thornton International Business Report explores the mood of businesses as economic recovery takes root in Europe - including the decreasing interest in expanding the European Union.

Pikria Saliashvili

The picture across Europe is much brighter than it was twelve months ago. Business leaders expect increasing returns, decreasing debt level, and increasing recovery. Business optimism across the EU climbed to 39%, up from just 2% this time last year. However, while the support for integration efforts remains solid, support for further EU expansion is waning. Results of last week's EU parliamentary elections further threaten the business growth model.

According to the Future of Europe report, published by Grant Thornton International Business Report (IBR), economic recovery has taken root in the European Union. While businesses across the EU remain divided in their support for further integration, they remain cautiously optimistic about the future.

Business optimism is reflected in the growth numbers. While the unemployment numbers remain far from ideal, EU unemployment is expected to move in the right direction, from 10.9% in 2013 to 10.4% by 2015. Additionally, EU is expected to grow by 1.5% in 2014 and by 2.0% in 2015. For some countries, even modest gains represent an important achievement. For instance, Greece is expected to grow for the first time since the recession (by 0.6%). This shift is symbolic for the EU, as the 28-member state climbs out of a recession.

The EU is poised to emerge relatively united, but skeptical of expansion. The vast majority of businesses in the Eurozone remain committed to the euro. However, while more than 90% of businesses support the single currency, a strong majority oppose expansion. Interestingly, business leaders in non-EU countries see decreasing benefits for joining the EU. Only 41% say integration would help their business, down from 62% in 2012. Multiple reasons can be responsible for this decrease. For one, the sovereign debt crisis could have dampened the attractiveness of the EU model. While reticent to expand, the EU is willing to consolidate. Inside the Eurozone, a vast majority of business leaders continue to support further economic integration of member states; 62% are in favor. However, figures differ across Europe. Except Estonia, most of the Baltic and Nordic states voice strong approval. On the other hand, France and Germany, the driving forces behind the EU project, have become increasingly skeptical of further European integration.

Post-World War II, in an effort to integrate the European economy, France and Germany established the European Coal and Steel Community. More than sixty years later, the two countries have shifted from being the biggest supporters of integration to being two of the principal skeptics. Only 55% of business leaders in Germany are in favor of economic integration, down from 76% this time last year. In France, support decreased by 12 percentage points to 57%. The loss of faith in two of the largest EU economies could have significant implications for future economic perspectives of the EU.

French and German businesses have divergent experiences of euro membership. In recent years, different levels of economic performances have led to a marked split in support for the single currency. In 2012, as high as 71% of French businesses agreed that euro membership had been positive. This year, only 58% held positive views of the euro. Views of their German counterparts have remained consistent at 86%for the past two years.Differing economic performance levels have shaped how France and Germany expect to grow.

Political considerations pose an obstacle to European integration efforts. Geopolitical and energy insecurity as well as nationalist sentiment raise concerns for European stability and unity.More recently, anti-European parties made significant gains in European Parliamentary elections. How the anti-establishment parties affect concrete policy outcomes is unclear. In any case, the surge in populist support across the EU has the potential to influence business expectations.The first-place finish of far-right National Front (FN) party in France is indicative of a growing trend of decreasing business support. Several anti-EU parties have championed

Despite recent developments that indicate a level of uncertainty in Europe, growth potential remains solid. As both business confidence and growth indicators remain on the rise, markets are likely to remain optimistic. As Europs's economic recovery is still fragile, it is important that optimistic business expectations are translated into meaningful growth.