German Think Tanks: No Immediate Recession

November 3rd, 2011
in econ_news

eu-puzzle Econintersect:  The still lingering threat of a possible Greek bond default in a less orderly fashion than agreed to by European leaders last week does not pose a situation that is anything like the Lehman Brothers collapse in September 2008.  This is the collective opinion of Germany’s leading economic think tanks, according to Der Spiegel.  A report issued in the middle of October warns that a Greek insolvency would stress the Eurozone economy and lead to a slightly lower GDP result for 2011 and 2012.  However, “contagion of the same extent as after the Lehman Brothers bankruptcy is very unlikely.”

Follow up:

From Der Spiegel:

The report forecasts that production in the euro zone as a whole could actually contract slightly this winter as global demand dries up. A recent report on euro-zone economic activity issued by global consulting firm Ernst & Young lowered its 2011 growth forecast for the common currency area from 2 percent to just 1.6 percent. For 2012, the consulting firm expects a growth rate of 1.1 percent, down from an original forecast of 1.6 percent. Although the economists did not identify an immediate threat of recession, they are pointing to a more challenging economic situation.

The reasons for the darkening mood are not difficult to divine. In Thursday's report, German economists pointed to Europe's ongoing inability to solve its growing debt crisis coupled with concerns that it could now be spreading to the Continent's banks. "The debt and confidence crisis in the euro area," the report reads, "is having increasingly adverse effects on the German economy."

Furthermore, the report was very clear about what must now be done to restore confidence in Europe's handling of the crisis. "Economic policy in the EU has been heavily focused on using all possible means to prevent the insolvency of a euro country," the report reads. "Instead of this course, it should create a workable insolvency mechanism for states and a European procedure for the recapitalization and, where necessary, an ordered insolvency of banks."

In addition, the majority of the economics experts who participated in the study were sharply critical of the European Central Bank policy of buying sovereign bonds from heavily indebted euro-zone countries. The practice, the report wrote, has put the ECB's independence "at risk."

Source:  Der Spiegel

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