The European Economic Advisory Group at CESifo (EEAG)* has released its twelfth Report on the European Economy today in Brussels. The international group of scholars expects world GDP to grow by 3.3 percent this year, up from 3.0 percent in 2012, but down from 3.8 percent in 2011, using purchasing-power parities. At market prices, world economic growth will climb to 2.5 percent this year, from 2.3 percent in 2012, remaining below potential. The experts foresee some improvement in the economic situation in all major regions during the course of 2013. Once again, the emerging economies are expected to deliver the strongest contribution.
World trade will perk up noticeably, from a weak 2.4 percent in 2012 to 3.6 in 2013, but still far lower than the 5.8 percent of 2011.
With sequestration still threatening to trigger across-the-board spending cuts, the United States’ unresolved budget issues have heightened policy uncertainty regarding the eventual tax and spending landscape. The country’s economy is consequently expected to do little more than stagnate in early 2013, before picking up later on. For the year as a whole, GDP growth should slow down to 1.6 percent, compared to 2.1 percent in 2012. Unemployment will continue to fall, however, from 8.1 percent in 2012 to 7.8 percent in 2013. Inflation should remain moderate at around 2.1 percent.
The decline in economic growth in China has bottomed out and the economy should regain momentum to reach 9 percent growth this year, versus 7.8 percent last year. In Japan, only a weak recovery in the economy can be expected in 2013, with growth edging up to just 0.8 percent. The on-going confrontation with China over the Senkaku/Diaoyu islands will continue to hamper Japan's foreign trade with its neighbour. Exports of Japanese cars to China, for instance, plunged by a stunning 75 percent between July and October 2012. Japan’s trade balance against China dipped into the red in September for the first time since data have been recorded.
India’s economyis forecast to pick up slowly this year, rising from 3.7 percent in 2012 to 4.6 percent. Inflation, however, will still remain high at 8.2 percent, albeit better than last year’s 9.4 percent. Russia’s GDP growth is expected to slow down from 3.0 percent in 2012 to 2.5 percent this year. Latin America, in contrast, will accelerate from 2.4 percent in 2012 to 3.6 percent in 2013. The Latin America figure is a weighted average for Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela.
The European Union’s economy, in turn, will stagnate at 0.1 percent growth in 2013, after decreasing by 0.3 percent last year. Inflation will drop from 2.6 percent in 2012 to 1.9 percent this year, but unemployment will increase from 10.5 percent to 10.9 percent. The economic gap between individual member states will continue to grow, with aggregate production shrinking further in the crisis countries (with the exception of Ireland), and with their financing conditions, while already on the mend, likely to remain unfavourable compared to the core countries’. The German economy looks set to grow by 0.7 percent in 2013, after a very weak start. Domestic demand, the demand for German exports from outside the European Union, and imports will all continue to rise, while construction activity should remain an engine for growth. Employment will basically stay at current levels, with 35,000 new jobs created and the unemployment rate dropping from 5.5 percent in 2012 to 5.4 percent this year. Inflation is expected to fall from 2.2 percent in 2012 to 1.7 percent in 2013.
France will grow by 0.3 percent, its exports languishing due to the country’s gradual loss of competitiveness. It is not likely to meet its goal of reducing government deficit to below 3 percent this year. Unemployment is expected to rise to 11.1 percent, and inflation to drop to 1.8 percent.
The United Kingdom’s economy should experience a moderate expansion, reaching 0.8 percent, while unemployment is expected to drop to 7.6 percent and inflation to 2.4 percent.
Italy’s GDP will contract by 0.9 percent, as a result of continuing political uncertainty. Exports will rise only slightly, but imports will drop, improving the trade balance. Average unemployment will hit 11.7 percent, with inflation at 2.3 percent.
The Spanish economy will remain in a structural crisis, contracting by 1.2 percent this year. Private consumption looks set to remain subdued, unemployment will rise to 26.8 percent, and inflation will stay low, at 1.8 percent. Portugal and Greece will remain in recession (-1.6 percent and -5.0 percent, respectively), but Ireland is likely to see a moderate expansion (1.0 percent). Unemployment will rise in all three countries. Most economies in Central and Eastern Europe will experience positive GDP growth, with the exception of Hungary (-0.3 percent). Recessionary trends will nevertheless continue in most of the countries in this region. Hungary, the Czech Republic, Romania and Bulgaria are threatening to slip into recession, while Poland is struggling to compensate for weak demand for itsexports. The best performers in the European Union will be Lithuania (3.9 percent), Estonia (3.5 percent), Latvia (3.2 percent) and Sweden (2.3 percent).
Like last year, the economies of all European countries outside the euro area (with the exception of Hungary) will grow, while only 10 out of the 17 in the euro area look set to expand, or at least stagnate. This should translate into 0.1 percent growth for the European Union and a 0.1 contraction for the euro area.
In other chapters of the report, the authors present a thorough analysis of the imbalances plaguing the euro area, from trade through competitiveness to current accounts, and outline strategies for correcting them. They also address the labour market woes affecting many European countries both inside and outside the euro area, and examine the root causes of the malaise before proposing remedies to it. Finally, they take a close look at what we can learn from US history and its current institutions in terms of setting up a fiscal union.
Some of the report’s policy recommendations regarding these issues:
European imbalances Deflation in the Eurozone’s southern countries and/or inflation in the core are indispensable for the southern countries to regain their competitiveness.Increasing VAT while cutting direct taxes may contribute to the required change in relative goods prices.Deflation in southern Europe calls for fiscal consolidation. To achieve this, it is more advisable to cut expenditures rather than to raise taxes.Overindebted countries should be helped by haircuts on their debt at the expense of their creditors.
Labour Markets
Two-tier labour markets, characterised by a marked distinction between temporary and permanent jobs, should be eliminated, since they increase youth unemployment.Make dismissal costs for firms modest and predictable, in order to enhance labour market flexibility.Wage bargains should not be imposed on firms where unions do not represent a large enough fraction of the labour force. In cases where industry-wide agreements exist, firms and their workers should be able to deviate from them.Introduce and improve vocational education, training and apprenticeships.
The US as a model for the euro area
A fiscal union requires first establishing a European federal state. Without such a unitary state, deeply divisive developments could occur, such as those that tested the USA in its initial years.The Eurosystem lacks a system to settle its Target balances. The equivalent system in the US, known as Interdistrict Settlement Account, could offer an example for Europe. Such a system would provide an incentive to settle outstanding balances, helping to contain these at a low level.
