The State of the European Union. The European Parliament faces its most important elections yet

2018: A YEAR OF SLOW PROGRESS IN EUROZONE REFORM 75 Economic recovery: signs that the eurozone still needs to be reformed Since 2014, the eurozone has generated eco- nomic growth under generally benign condi- tions. Although the eurozone’s ongoing eco- nomic recovery might suggest that the common currency has been stabilized, some aspects of this recovery point to the need for major re- forms. Firstly, the trade imbalances between mem- bers of the eurozone have scarcely changed. Over recent years, the current account balance of countries on the southern periphery, such as Spain and Portugal, has improved significantly: from pre-crisis deficits of -12 and -10% of GDP to small surpluses. However, the current ac- count balance of core countries has continued to increase, with Germany’s surplus rising from a pre-crisis figure of 5% to reach almost 8% at present. If, during the period prior to the financial crisis, the high borrowing needs of countries on the periphery created a vulnerability to the in- terruption of flows within the eurozone, during the recovery we have seen that some of the core countries, such as Germany, have main- tained a high funding capacity while the capac- ity of countries on the periphery continues to be greatly reduced. This trend is particularly worrying given that the core countries have maintained their current account surpluses even though, during the period 2011 to 2015, their economies grew at significantly faster rates than the eurozone as a whole. Moreover, recent episodes of concern about levels of fi- nancial risk have confirmed that financial mar- kets continue to consider the debt of core countries as the risk-free European asset par excellence , whereas the debt of peripheral countries is viewed as less safe. Secondly, the recovery process has occurred within the context of low growth in the euro- zone as a whole, accompanied by sluggish in- vestment, which bodes ill for the future. If this growth is to increase, it will need to be driven by higher levels of investment to expand the pro- ductive capacity of member countries. And for investment to increase in this way, measures must be implemented Europe-wide, particularly in those countries with high fiscal deficits. The combination of low inflation with high current account surpluses in some countries, as men- tioned above, could also be solved through in- creased investment in those countries with high savings rates. A Europe-wide investment pro- gramme led by these countries would not just increase potential growth but would also re- duce imbalances within the eurozone. Thirdly, while fears about the possible revers- ibility of the monetary union have declined, this threat has not completely disappeared. Although the eurozone has experienced continuous growth since 2012, there have been a number of episodes during this period where investors have lost confidence, including fears that Greece would crash out of the eurozone in 2015. And, in 2018, the financial markets became jittery in response to the possibility of the Italian govern- ment implementing measures that would be hard to reconcile with continued membership of the single currency. During each of these epi- sodes, although contagion of other countries such as Spain was on a smaller scale than during the crisis, it remained an issue. Moreover, the limited scope of this contagion may not have been the result of the enhanced credibility of the eurozone but may instead have been due to other factors, such as the sovereign debt pur- chasing programme of the European Central Bank (ECB). The risk of contagion as a result of a member country leaving the eurozone cannot,