the secular situation isn’t great

On average, the population of the EU is older than that of the US and younger than Japan’s.  It faces the same problem as the two other traditional economic powers of waning trend GDP growth, based on minimal expansion of the workforce.  If the workforce in the US is growing by 1%+ per year and Japan’s shrinking by -0.5%, the EU’s is  somewhere in the middle, rising by, say, 0.5%-.

It, too, is caught by anti-change forces bolstered by claims of “exceptionalism,” but of a complex sort.  France, Italy, Germany, the UK…each claim that it is exceptional–and that the others are not.  This hinders productivity growth.

All in all, not a pretty sight for investors.

cyclically, though…

…the EU has several positive factors going for it at the moment:

–the value of the € against the dollar has fallen from $1.40 in mid-2014 to $1.08 now.  That’s almost a 25% drop.  Yes, the devaluation has caused a massive decrease in €-area wealth.  But that’s the past.  The currency decline is also acting as a significant boost to economic activity, in the same way a sharp drop in interest rates would.  This positive effect is most pronounced for export-oriented or import-competing activities.

–after several years of GDP-growth pummeling austerity measures, the EU has belatedly adopted the same quantitative easing the US successfully used to restore economic growth.  As a result, the EU is in a sense like the US with a three-year lag–meaning growth can have a monetary tailwind aiding it for the next few years.

–the EU gets most of its hydrocarbon energy from abroad.  Russia, for example, is a mammoth supplier of natural gas to the union–all priced on a heating value equivalent with oil (translation:  it’s very expensive).  As a result, the EU is a prime beneficiary of the drop in the oil price over the past year or so.  The decline in the € has offset that a bit, but oil still costs 40% less today in euros than in early 2014.

–the Grexit crisis is over.

–emigration from the Middle East, especially Syria, is a big plus.  An influx of millions of young, motivated, reasonably trained workers is precisely what a sclerotic EU workforce needs to underpin GDP growth.  Chauvinistic politicians will doubtless dampen the effect somewhat, but this is still a significant long-term positive.

All in all, I think the EU has the potential for surprisingly strong economic performance in 2016.