Eurozone to show small recovery signs next year, predict institutes
The eurozone is expected to see signs of a tentative economic recovery in 2011 but analysts say the rebound from the recent financial crisis will be clouded by persistent sovereign debt problems,
A report from Euroframe, a group of the 10 most respected economic forecasting and research institutes in Europe, is forecasting that gross domestic product in the 16-nation currency bloc will increase by 1.6% in 2011 and 1.l7% in 2012.
Euroframe’s forecast for 2011 is higher than the 1.5% predicted recently by the European Commission in Brussels.
The report contains projections of key economic variables for the major European Union countries and the US. It analyses the effects on the euro area of the fiscal consolidation measures to be implemented over the period 2010 to 2012.
“The persistence of elevated risk premiums and the sovereign debt problems in Europe are obstructing the return to normality in financial markets which is necessary to underpin a broad-based economic recovery. High unemployment and the implementation of austerity measures to reduce large fiscal deficits built up during the crisis will weaken the pick-up in aggregate demand,” the report says.
While growth is picking up more strongly than expected in Germany, the outlook for countries with severe debt and competitiveness problems, notably Greece, but also the Republic of Ireland, Portugal, Spain and to some extent Italy, is more subdued, it says.
Germany appears to be one of the few eurozone economies benefiting from the ongoing crisis regarding sovereign debt,
“The (Frankfurt) stock market has rallied to its highest level in more than two years, confirming that the German economy has become the safe haven of the eurozone debt crisis,” said ING Bank economist Carsten Brzeski.
Labour market conditions in the eurozone are expected to remain challenging throughout 2011 with the unemployment rate projected to stand at 9.7% in 2012. The case of Germany illustrates the importance of wage moderation in reducing the unemployment rate, the report says.
Given the moderate outlook for inflation, the European Central Bank is expected to raise the main refinancing rate slowly in the course of 2011 and 2012 in line with the forecast recovery.
“We anticipate the ECB will raise the main refinancing rate to 1.6% by the end of 2012,” the Euroframe report adds.
Although France and Germany moved at the end of 2010 to strengthen eurozone defences, a number of economists have questioned whether the single currency area can survive in its present form.
A leading UK independent economics think-tank is the latest group of experts to cast doubt on the survival of the euro. It says that to keep the single currency in its current form would require a reduction in consumer spending of 15% or more in Ireland, Greece, Spain, Portugal and Italy.
Such cuts would be greater than the fall in consumer spending faced by the UK in the Second World War, according to a calculation contained in the latest issue of Global Economic Prospects from the Prospects Service of the Centre for Economics and Business Research.
The report argues that for the euro to survive in its current form, five things need to happen: German growth needs to be 3% plus for at least four years; a European bailout fund sufficient to bail out Spain and Italy needs to be constructed; a system whereby the European Union has some control over economic policy in the weaker economies needs to be constructed and encapsulated in a new treaty; government spending in weaker economies needs to fall by around 10% of gross domestic product; and living standards in weaker economies need to fall by on average 15%.
However, the report argues that making all these things happen at the same time is unlikely to prove politically or economically acceptable in most European countries.
Ernst & Young is predicting that the region is “likely to muddle through” the current crisis but a “three-speed” Europe lies ahead.
The accountancy firm believes Germany, Austria and Slovakia will grow steadily in 2011, a northern bloc including France and the Netherlands will grow more modestly, and peripheral countries like Ireland and Greece will see their economies contract.
Ernst & Young believes trouble in the eurozone will mean softer demand for UK exports and weaker UK growth.
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