The economy of the Eurozone region will decline in 2013. That is the pronouncement of the European Union’s (EU) official economists.
The European Commission sees a contraction in spending by European businesses and consumers. It also sees regional unemployment pushing new highs. The result? A .3% contraction for 2013.
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If unemployment becomes structurally entrenched, it will have grave consequences and will weigh on future growth prospects.
High unemployment will exacerbate the effects of the strict austerity programs that have helped to slow the region’s growth and spur higher unemployment rates.
The Commission also sees the average Eurozone budget falling short of the targeted 3% of national output for the first time since 2008.
Ironically, the Commission uses this report to determine whether it will push for even greater austerity by national governments.
However, the Commission has adopted a more flexible approach to budget evaluation in recent years.
And if the markets’ expectation that the US Fed will begin to raise rates is correct, it should be reasonable to assume that Europe will begin cutting them.
This is despite a recent jump in German business confidence that many say will translate into a recovery for the German economy.
But there is no guarantee that a recovery in Germany will spread to the rest of the region. Such a recover is likely to further benefit core economies in the zone like the Netherlands rather than
distressed countries like Greece or Spain.
This puts into question the European Central Bank (ECB) president Mario Draghi’s recent statement that a positive contagion in the form of improved bank balance sheets would benefit
all Eurozone economies.
But the longer it takes for the region to recover, the greater the pressure
will be on the ECB to cut rates and ease monetary policy further. Such easing also has to be considered in light of the strength in the euro.