Further rate cut will not solve eurozone’s ills
The report was published in the middle of the latest crisis in the area involving Italy and Greece and the emergence of pressure on French borrowing costs.
The commission now expects real GDP in the eurozone will rise by just 0.5% in 2012 compared with 1.5% in 2011. In its last semi-annual report in the spring, it had forecast that the euro area would grow by 1.6% in 2011 and by 1.8% in 2012. The commission has also released a first forecast for 2013, projecting a rise in real GDP of 1.3%.
Preliminary real GDP data for the eurozone for the third quarter will be published today. The best estimate is that real GDP rose by 0.2% in the quarter.
The commission expects that the euro economy will contract by 0.1% in the final quarter of 2011 and show no growth in the first quarter of 2012. Thereafter, a very modest recovery gets under way.
At this juncture, the commission’s forecasts are loaded with downside risks. Allowing for statistical margins of error, next year’s forecast of a rise in real GDP of 0.5% could be close to zero. However, if the problems persist, real GDP may fall.
The forecasts fall short of a technical recession, which is a fall in real GDP over two consecutive quarters, because real GDP only declines in the last quarter of 2011. Further slippage in the first quarter of 2012 cannot be ruled out.
Whether there is a technical recession or not, the commission’s forecasts paint a very gloomy picture of the next two years. The unemployment rate in the euro area is set to stay above 10% out to 2013. The Spanish unemployment rate will remain over 20% and at over 10% in France. Ireland’s is expected to fall from 14.4% in 2011 to 13.6% in 2013.
The commission’s forecasts for Ireland are very similar to those of the IMF and the troika. Real GDP is forecast to rise 1.1% this year and in 2012, and accelerate to 2.3% in 2013. All of the growth comes from the trade side as domestic demand continues to fall under the downward pressure of required austerity in order to restore order to Ireland’s public finances.
Slow growth will make it very difficult for any country to improve its public finances and to reduce its high rate of unemployment. The pressure is on governments, therefore, to find ways to eliminate budget deficits while also introducing structural reforms that will lift the economy’s long-term growth potential.
Financial markets are in a very impatient mood and will not tolerate anything less than solid proposals to achieve both immediate cuts in deficits and improve the prospects for economic growth. Not every country in the eurozone is in the same degree of difficulty as regards their deficit and debt levels but the recent experience shows that markets are, in general, increasingly fearful for the eurozone as a whole. The contagion effect has spread within Europe and no country is safe from turbulence.
The ECB cut official interest rates earlier this month in the expectation that the euro economy could fall into recession in 2012. Today’s data on euro area GDP and the figures for individual countries will tell us more about the risks of recession in the previously strong countries such a Germany.
A further cut in official interest rates before the end of the year cannot be ruled out but as markets have demonstrated, lower borrowing costs are not the solution to Europe’s problems. Decisive and creative political action is required.
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