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02/12/2016

Eurozone ‘a problem’ for the world economy

Euro & Finance

Eurozone ‘a problem’ for the world economy

Euros for the taking.

[aranjuez1404/Flickr]

The eurozone is struggling to revive itself, and may slip into recession in the next two years, slowing down the global economic recovery, according to the French Economic Observatory (OFCE). EurActiv.fr reports

The director of the OFCE’s analysis and forecast department, Xavier Timbeau, presented his economic predictions for 2014-2015 on 29 October, saying “the eurozone is a problem for the global economy”.

The expert believes that the eurozone is acting as a brake on the world economy, and will enter into “a phase of low inflation or even deflation in certain countries,” leading to a eurozone recession within two years. The Observatory’s economists say this change will be slow, but almost inevitable.

>> Read: Germany lowers growth forecast amid eurozone ‘doldrums’

Germany, the mainstay of the eurozone, is expected to see limited economic growth of 1.5% in 2015 (with 1.4% forecast for 2014). The prognosis for Italy is also disappointing: it is expected to go into recession. Spain, where unemployment remains at 25%, is the only eurozone economy where economic growth is expected to rise, with 2.1% percent predicted for 2015.

Political decisions called into question

After a period of revival in 2011, the recovery of the eurozone has been sluggish. Timbeau attributes this to budgetary decisions taken by member states and to “the toughening of monetary conditions in 2013-2014”. Even if economic constraints are loosened, the effects of austerity measures from 2012 and 2013 continue to weigh the economy down.

The Observatory claims to be “moderately optimistic for 2015,” foreseeing eurozone growth of 1.3%.

The OFCE economists are sceptical about the future European Commission President’s investment plan. Xavier Timbeau said that “Jean-Claude Juncker’s investment plan will be expertly put together from existing measures, but it will not contain anything new”.

Greater optimism for France

The OFCE expects to see a slight improvement in the French economic situation in 2015, predicting growth of 1.1%, compared with 0.4% in 2014. This change is due to “the decline of two negative factors that have stifled economic growth since 2010: borrowing conditions and the reductions of deficits”. “France should also become more competitive as the euro drops in value, and the tax credit for encouraging competitiveness and jobs (CICE) becomes more powerful,” the OFCE said.

This moderate improvement in the situation will not be enough to bring down unemployment or have a significant impact on public deficits. The Observatory foresees an unemployment level of 9.8% and a public deficit of 4.3% for France in 2015.

>> Read: Italian jobs summit fails to impress

Finally, Xavier Timbeau believes that the presentation of France’s 2015 budget was “rather clumsy”. He said that France was making an effort, but that some of the measures outlined in the budget were questionable, such as the anticipated lowering of interest rates, which would bring down the total cost of borrowing in 2015. “This is not a structural change that should be brought about through the budget,” the economist said, adding that the Commission’s acceptance of this bill demonstrates just how fed up everyone is with the French budget.

>> Read: EU provisionally clears French, Italian budgets after tweaks

Background

France's deficit is fast becoming problem number one of the Eurozone. While many countries have tightened their belts by laying off civil servants and cutting pay, France has done neither. The country's public deficit remains very large, and the lack of economic growth leaves a diminished tax base.

Further Reading