By Deborah Ball 

DAVOS, Switzerland -- In a clear break with upbeat sentiment among U.S. executives, European corporate leaders and policy makers gathered in Davos expressed concern over what will be a momentous year on the continent, amid a populist wave and national elections in some major economies that could endanger the region's modest upswing.

Europe's economy has been turning up over the past year. Growth is steady if unspectacular, and inflation is pulling away from zero.

Valdis Dombrovskis, European Commission vice president for the euro, said in an interview that every country in the 28-nation European Union is expected to grow this year -- even Greece. Eurozone growth is forecast to accelerate from 1.5% this year to 1.7% in 2018.

Indeed, EU gross domestic product is finally above precrisis levels, while unemployment in the bloc is down to 2009 levels. Government debt and deficits are also down.

"The economic recovery, while quite modest, is resilient to different risk factors, political uncertainty being one of them," said Mr. Dombrovskis.

However, elections in Germany, France and possibility Italy could throw a wrench into the recovery, particularly if populist parties -- many of whom oppose the single currency -- continue to surge.

Indeed, while investors and analysts expect the European Central Bank to continue to pare back its bond-buying program, political developments could derail that.

"If something goes wrong, [ECB President Mario Draghi] could flood the markets to stabilize," said Oliver Bäte, chief executive of German insurer Allianz SE. "We need to be prepared for that scenario too."

Moreover, in the short term, political uncertainty tends to hold back hiring, said Stefano Scabbio, head of southern Europe for Manpower. For instance, the strong job creation that Spain has experienced in recent years stalled last fall while Spanish political parties struggled to form a new government.

European leaders also underscored a series of other roadblocks to a more robust recovery in Europe. The threat of terrorism hangs over the continent. For instance, Marriott's hotels in France "still haven't recovered," said CEO Arne Sorenson.

And the scarcity of investment in Europe will curtail any major improvements in joblessness, many executives and policy makers say. "You cannot create jobs through regulations," said Mr. Scabbio. "They come from investment and boosting growth."

Italy, the eurozone's third-largest economy, remains a major drag on the region, with growth far lower than neighbors such as Germany and even Spain. A major problem remains its banking system, which is burdened with EUR200 billion ($187.6 billion) in bad loans that is constricting new lending.

Italian Economy Minister Pier Carlo Padoan said he would like to see bad loans fall by half, but the reduction -- while proceeding -- will take time. "It's like a diet," he said. "It's not like someone is overnight going to lose 20 kilos. It's important to keep going."

The prospect of a populist party coming to power in one of Europe's large countries also hangs over the corporate and financial outlook.

Mr. Sorenson said the populist wave in Europe and the U.S. raises concerns about the sort of policies -- particularly restricting freedom of movement -- that could affect tourism and travel. "There is a real need for those issues to be addressed," he said. "If they're not addressed constructively, it can profoundly impact our business."

Christophe Weber, the French-born CEO of Japanese pharmaceutical giant Takeda, underscores concerns that anti-immigration policies could affect the issuance of visas to the high-skilled foreign researchers that are vital to his industry. "We are used to pooling talent, independent of nationality," he said. "If there are very strict quotas, that could block the movement of high quality individuals."

While policy makers and business leaders still assign a low possibility to a breakup of the euro, the concerns following Brexit nonetheless linger. "If you have another country following the U.K., those are uncharted territories," said Mr. Sorenson.

--Charles Forelle and Stephen Fidler contributed to this article.

Write to Deborah Ball at deborah.ball@wsj.com

(END) Dow Jones Newswires

January 18, 2017 15:46 ET (20:46 GMT)