The EEAG Report on the European Economy 2012. The Euro Crisis

On 27 February 2012, the European Economic Advisory Group at CESifo presented its eleventh report 'Report on the European Economy' at a press conference in Brussels and at press conferences in major European cities.

The pan-European group of scholars expects world GDP to slow to 3.3% in 2012, down from 3.8% in 2011. An anticipated improvement in consumer and producer confidence in advanced economies during the second half of 2012, however, should stimulate growth somewhat towards the end of 2012. Once again, the emerging economies are expected to deliver the strongest contribution, while North America and Europe will remain below their potential. The growth in world trade, in turn, will continue to slide, falling from 12.2% in 2010 to 6.2% and to 3.9 percent in 2012.

The United States’ continuing deadlock in Congress and the upcoming presidential election are sources of great uncertainty, but the healthy corporate profits generated particularly by large companies, combined with low interest rates, will raise the country’s growth rate, after a slowdown during the first half of 2012, to 1.9% for the entire year, versus 1.7% in 2011.

China is projected to grow by 8.1%, India by 6.5%, Russia by 3.5%, and Latin America by 3.5%. The Latin America figure is a weighted average for Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela.

By contrast, the European Union’s economy, after experiencing negative growth during the last quarter of 2011, will see its GDP stagnate during the first quarter of 2012, with a paltry 0.2% for the entire year, compared to 1.6% in 2011. Inflation will drop from 3.0% in 2011 to 1.5% in 2012, while unemployment will creep from 9.7 to 9.9%.

Within the euro area, domestic demand will be particularly weak in France, Italy and Spain, as well as in the periphery, but it will remain relatively robust in the region’s northern countries. Germany will grow by 0.4%, while the economies of France, Italy and Spain will contract by 0.3, 0.6 and 0.6%, respectively. Greece’s economy will shrink by 3.6% and Portugal’s will do likewise, by 3.0%. The best performers will be Estonia and Slovakia (+ 2.4 and 2.0%, respectively). Overall, the euro area’s GDP will fall by 0.2% in 2012, after growing by 1.5 in 2011. Inflation will be subdued, at 1.2% for the year, but unemployment will inch to 10.7%, from 10.2% in 2011. The worst performers in terms of unemployment will be Spain (23.0%), Greece (19.6%), Ireland (14.9%), and Portugal and Slovakia (both with 13.9%).

All European countries outside the euro area will grow, with the United Kingdom achieving 0.8%, Sweden and Poland surging by 2.6%, and Hungary managing just a meagre 0.2%

In other chapters of the Report, the authors present a thorough analysis of the euro area’s balance of payments problems, providing some possible avenues for correcting the imbalances. One of the more salient proposals is the introduction of a system of short-term treasury bills that they dub Euro Standard Bills, that would be standardised and collateralised by each corresponding government with state-owned real estate or senior rights to future tax revenue. These bills would facilitate monetary policy transactions of the ECB and could be used to gradually redeem the 800-billion-euro Target debt that up to now has been accumulated between the euro area’s national central banks.

The authors also perform case studies on two strikingly contrasting countries in terms of economic performance, Sweden and Hungary, that can provide useful lessons to countries both within and outside the euro area. Sweden went from a severe financial crisis to an enviably solid position, while Hungary went from a front-runner in convergence and reforms to one of the most financially vulnerable countries in Central and Eastern Europe.

The authors once again tackle banking regulation, analysing what has been done to date and what should be done in order to improve oversight and banks’ resilience. Finally, they devote a chapter to putting a price on climate change, analysing current policies and reviewing the lessons we have learned so far that can help to improve the approaches to combat global warming.

Chapters are:

+ Recommendations for Europe
+ Chapter 1 - The Macroeconomic Outlook
+ Chapter 2 - The European Balance-of-Payments Problem
+ Chapter 3 - Banking Regulation
+ Chapter 4 - The Swedish Model
+ Chapter 5 - The Hungarian Crisis
+ Chapter 6 - Pricing Climate Change

• Primary Source

Spiegel Online International, 22.2.11: Economists Warn Greece May Have to Quit Euro http://www.spiegel.de/international/europe/0,1518,746957,00.html

European Economic Advisory Group at CESifo: EEAG Report on the European Economy (link to the latest edition) http://www.cesifo-group.org/eeag

---