Econintersect: In its latest projections, the European Commission, the European Union’s executive body, forecast a 0.3 percent contraction in the eurozone 
economy for 2012, with Greece’s economy leading the way downward with a massive 4.4 percent decline, according to the Associated Press. But ECB (European Central Bank) president Mario Draghi said this week that the Eurozone economy is on the mend after a very weak ending to 2011 (Reuters). Observers may wonder if the Commission is flinching at shadows or if Draghi is whistling by the graveyard. If both are correct then the final numbers for the fourth quarter will have to be grim indeed to have an 0.3% decline for the year 2012 actually look like a “recovery.”
Whether Draghi is expecting the Greek bailout to be part of the successful slow recovery was not specified, but he was quoted this week saying the compliance of Greece with the austerity terms of its bailout must be flawless (AP). Many are skeptical that full compliance is even possible and that if it is achieved the decimation of the Greek economy will be such that the resulting GDP will fall far short of what is needed to achieve the target debt-to-GDP ratio of 120%.
The outlook from the EU Commission has worsened considerably in the past three months. From the AP:
In its last forecast in November, the Commission had predicted a 0.5 percent expansion across the eurozone economy following last year’s 1.4 percent growth. The difference this time is that it now expects the economies of Belgium, Spain, Italy, Cyprus, the Netherlands and Slovenia to contract in 2012, not just Greece and Portugal.
The overall decline is limited by resilient activity the eurozone’s two-largest economies, Germany and France. Growth in Germany for the coming year is expected to hit 0.6 percent while France is forecast to grow by 0.4 percent.
The new forecasts will add to fears about Europe’s prosperity and that government cutbacks to reign in spending and deficit levels are having a negative impact. Unemployment levels have been increasing across the region — the jobless rate in Spain has hit 23 per cent, for example — while European banks have been finding it increasingly hard to raise new funds.
Here are some details of Draghi’s optimism from from Reuters:
Asked if the positive signs had increased since the ECB rate-setting meeting earlier this month, Draghi told German daily Frankfurter Allgemeine Zeitung (FAZ) in an interview: “Yes, I would say so, although uncertainty remains high.”
In an interview with the Wall Street Journal (WSJ) he added that despite some better signs “the recovery is proceeding very slowly and remains subject of downside risks.”
The Italian also said there was no risk of the euro zone entering a Japan-style lost decade.
Sources:
- EU expects eurozone to suffer mild recession (Gabriele Steinhauser, Associated Press, 23 February 2012)
- ECB’s Draghi syas euro zone recovering slowly (Reuters at Yahoo News, 23 February 2012)
- Draghi: Greek compliance must be ‘flawless’ (Associated Press via Google, 23 February 2012)
News articles found at Econintersect Europe newspaper page.
