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It isn’t raining yet, but clouds are gathering over Europe. Growth is slowing. While rising employment and growing wages should support household spending, that can’t fully offset the falling contribution from trade. So we have cut our forecast for eurozone growth to 2.0 per cent this year and to 1.7 per cent in 2019.

The darkest cloud is the growing threat of an all-out trade war. US tariffs may impact Europe less than the NAFTA and Asian economies, but we estimate that a 1 percentage point fall in global trade growth would reduce eurozone export growth by around 0.65 points, other things equal. Even after allowing for weaker imports, that alone could reduce eurozone GDP growth by 0.2 to 0.3 percentage points.

Meanwhile years of slow-growing incomes and, particularly in peripheral countries, austerity have fuelled political populism. When times are tough, people look for someone to blame and mainstream politicians and immigration are easy targets. While migrant numbers are sharply down, dealing with past inflows remains a bitterly divisive challenge.

Lifting living standards might be the best way to combat populism and euroscepticism. This requires structural reform. June’s EU summit was supposed to be a milestone in setting the direction for Europe, but little progress was made. With GDP growth now slowing, pushing through reforms may only get harder.

Historically, Europe responded to economic challenges with pushes for deeper integration. But now electorates and many politicians seem to want less Europe, not more.

Previously, all member states expected to benefit from further integration. However, nearly twenty years of monetary union has widened the gap between surplus and deficit countries.

Before the single currency, countries with debt or competitiveness problems could let their currency depreciate. In the euro, adjustment means falling wages and prices with years of austerity – and that breeds discontent. With some countries seemingly gaining more than others from the euro, making agreement on reform more difficult.

Like it or not, Europe has been mixing itself together for over half a century. The cost of stopping could be very high, given that even now important areas – notably fiscal and financial – are only partly integrated.

Further integration in these areas is vital to putting the single currency on a firmer footing. And it is still in the economic interests of all members, not least because the cost of break-up is so high.

Politicians may not relish telling German voters to accept the status quo because break-up is too expensive, but the euro has benefited Germany through increased trade and competitiveness and reforms need not necessarily make Northern European worse off. If surpluses were invested productively within the eurozone, everyone could be a winner.

While this is easy in theory, the waning political appetite for reform makes it less likely. In its absence, we can make several broad conclusions. First, continued sluggish income growth would encourage populism. Second, anti-European sentiment could be fuelled if constant brinkmanship between national governments and EU authorities produces compromises that satisfy no one.

Third, depressing the euro to keep economies competitive would mean eurozone interest rates rise only very slowly. But with its economy internally imbalanced, the eurozone would remain vulnerable to the global trade cycle – especially with a trade war threatened.

However, things would have to get a lot worse for euro break-up to be an option. Europe is just too mixed up.

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