The outlook for Europe next year is a bleak, delegates heard at the Economist Conference in Nicosia on Monday, a range of risks could undermine the downbeat forecast and the risk of a eurozone exit is not yet completely off the table.
Describing the eurozone as the “sick man of the global economy”, Laza Kekic, Europe Regional Director at the Economist’s sister company, the Economist Intelligence Unit (EIU), said that the EU forecast for next year was a “pretty grim story”, with growth estimated at only 0.1% in 2013 after an estimated contraction of 0.4% in 2012.
The only reason why the EIU did not forecast a bigger contraction this year, he said, was because of the resilience of the German economy. By contrast, they found that they were revising down the forecast for Spain and France every month.
Moreover, the risks to this bleak forecast were “very very high”, said Kekic, a comment echoed by Emmanuel van der Mensbrugghe, Director, Offices in Europe, IMF, who said their outlook for the global economy was similar to that of the EIU.
Kekic said that the bad news for the eurozone was that the rest of the world is also slowing. Although China was still racing ahead, its slowdown from a high base was not good for the global economy.
India, Brazil and Russia are also slowing, so the only major country recovering is the US, where bank recapitalisation is under way and consumers are deleveraging, which will eventually help demand.
A greater Deutschmark zone?
The EIU’s baseline forecast, with a probability attached of 60%, is that there will be high unemployment in Europe, weak demand less government spending and a slowly recovering US.
It puts only a 5% probability on the possibility of a mini-boom.
The EIU assumes that Greece will not exit the euro, although Kekic emphasised that the risks to the forecast are “enormous”. Spain and Italy are on the verge of crisis and there is no quick solution in sight.
“The bottom line is that they are political problems,” he said. “They take time. EU is a union of democracies not dictatorships.” It therefore takes time to get voters on board for major changes.
Despite the ECB’s pledge to do whatever it takes and the decision by the German constitutional court to allow the European Support Mechanism (ESM), Kekic said that one “can’t totally dismiss the idea that at some point the Greeks might decide the game is up” or that EU policymakers push things too far.
The EIU puts the risk of a eurozone break-up at 35%.
If one country leaves the euro, it will lead to others, the EIU believes.
“If Greece goes it is extremely unlikely that you could hold the line there. A complete eurozone break up would follow, including France, eventually”.
Those countries that were left behind would be merely part of “a greater Deutschmark zone”, he said.
John Peet, Europe Editor, at the Economist magazine (“newspaper” to insiders), underlined the risks of things unravelling.
While noting that the “markets seem slightly more benign today than they did in the summer”, he said “market sentiment can change at any moment”.
“The eurozone’s problems are not yet over,” he added.
Peet is also worried about the political problems of the eurozone crisis.
“Hollande is more pro-European than his predecessor. But right now they are not debating moves towards deeper integration in the eurozone,” he said.
The potential for a clash comes because while France wants debt mutualisation but not greater political and economic integration, Germany wants the opposite.
Peet said he was also worried about the growth of anti-German feeling in Europe. “Germany needs to do a lot more”, he said “but a mood of hostility to Germany is not a helpful one.”
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