While the EU is the second largest region by GDP, many consider China to be more important as it is the fastest growing economy of its size in the world, at 6% annual GDP growth. It’s also important to note that the EU will likely never grow at a pace above 3%, ever.
Many blame this due to its restrictive regulations, large welfare system, and more socialistic policies. While I believe this has a major impact restricting its growth the main problem has to do with its demographics.
People don’t realize how important demographics are to a country. In order for GDP to expand (and markets to go up) you need birth rates above 2.1 children/woman and a younger demographic (more young people that are of working age than old people drawing from the system). One needs to look no further than Japan to see what will more than likely happen to not only the EU but China and the US in the near future. From 1995 to 2007, Japans GDP fell from 5.33 trillion to 4.36 trillion in nominal terms. The country, economy, and stock market experienced stagnation for over two decades. All while the BOJ (Bank of Japan) printed a record amount of money just to keep the country from experiencing widespread economic depression and deflation. Japan today has a birthrate of just 1.44 and a median age of 47.3! The US also has a rapidly shrinking birthrate although not to the extent of the EU.
Europe could be considered to be in the same situation as Japan was two decades ago. With a birth rate of 1.6 and median age of 42.9 (compared to 38.1 in the US). What will they do to combat this and keep the EU from experiencing deflation and depression? Probably exactly what Japan did two decades ago and print their way out of it. The ECB (European Central Bank) has already signaled it is willing to continue its QE program (which purchases bonds and provides liquidity to markets). This is all they can do as they already have negative interest rates which were also implemented by the BOJ.
Another thing they have done to combat this demographic trend is to controversially allow massive migration from middle eastern countries. The US is also doing this via migration from mainly Latin American countries. This has helped but is only a band aid. When considering that many EU countries have very generous welfare programs, if migrants are not contributing and taking this takes a strain on the system and country as a whole.
The situation in the EU can best be described as grim. Best case scenario is they successfully print and prop up their economies the same way the BOJ did two decades ago. However there are many reason why this might not work and there are many critics to how central banks around the world operate. Over the period of human civilization there has never been a successful case of fiat money which is what we currently have in place. Will this time be different?