Tuesday, April 19, 2005

Lacklustre Euroland

In a speech in Washington yesterday Joaquín Almunia, European Commissioner for Economic & Monetary Affairs, outlined what is required to return EUrope, and more specifically Euroland, to growth.

We have become somewhat more downbeat about the EU’s growth outlook for 2005 since our previous, autumn forecast. This follows, in part, from the recent oil price hike and the strengthening of the euro. However, growth is projected to return to potential in the course of this year against the background of:

(i) accommodative macroeconomic policies;
(ii) continued wage moderation and low inflation;
(iii) supportive financial conditions;
(iv) widening profit margins; and
(iv) progress in structural reforms.
Given recent events I really cannot see this background materialising. Oil prices are set remain high. Inflation is set to remain above the ECB 2% target. Profit margins are being put under pressure by the strength of the €uro and Asian competition, and, progress towards structural reform is being slowed down by the constant dilution of necessary reform proposals in an effort to save the European Constitution from rejection by France.

Commissioner Almunia continued in his speech to say that:
Domestic demand is expected to take over as the main driving force in the euro area and the EU. In particular, investment is forecast to gather momentum, whereas private consumption is anticipated to increase more gradually. Employment growth is also set to accelerate gradually in both the euro area and the EU. This is expected to create 3 million new jobs in the EU during 2005-2006, while leading only to a modest decline in unemployment in view of the usual influx of persons actively seeking employment as the labour market situation improves.

Public finances remain broadly unchanged over the forecast horizon. The average deficit is expected to amount to 2.6% of GDP in both the euro area and the EU in 2005. Differences remain sizeable, with nine countries above the 3% reference value in 2004. Of these, five Member States (namely Greece, France, Cyprus, Hungary and Malta) are expected to narrow their deficits significantly in 2005, i.e. by more than ½ percentage point of GDP. Still, the number of Member States with deficits at or above 3% increases to 11 this year.
This is hardly upbeat stuff. The prospects of the Eurozone becoming an engine of global growth are remote, especially with so many key Eurozone economies in breach of the deficit rules. Negative growth, and possibly even recession, may be a far more likely scenario.

All quotes taken from Joaquín Almunia speech @ the Commission Press Room