Commission too optimistic in economic growth forecasts, analyst says

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Even if the European Commission seems slightly optimistic about future growth in the EU, some consider the EU executive’s forecast too rosy and warn against underestimating other risks. This has systematically been the case in the past years of crisis.

The Commission is cautiously optimistic regarding the EU's possibility of getting out of the eurozone crisis in the short term.

The optimism is not just "wishful thinking", said Karl Pichelmann, senior advisor at the European Commission's DG Economic and Financial Affairs. He spoke at a European labour market conference held by the European Trade Union Institute (ETUI) in Brussels on 31 January.

DG-Ecfin produces economic forecasts on behalf of the Commission. It produces short-term macroeconomic forecasts twice a year, in the spring and autumn. These forecasts concentrate on the member states, the euro area and the EU, but also include outlooks for candidate countries as well as some non-EU countries.

Pichelmann said that in the run-up to 2008 and 2009, when the global crisis fully erupted, there was a build-up of a dangerous leverage debt level cycle in the financial system with both private and public debt reaching levels not seen before in history.

This fragility in the financial sector was an accident waiting to happen. It occurred in the United Kingdom, the United States and in the euro area, but in the euro area it was reinforced by the imbalances between the surplus and deficit countries. 

Now, however, there are some reasons for optimism for the eurozone, which may be able to get out of the almost perfect storm which it has found itself in over the past couple of years, Pichelmann stressed.

He said the risk of a breakup of the euro area has diminished. "A year ago, gloomy headlines dominated about the eminent breakup of the euro area, predicting "grexit" [Greek exit from the eurozone] before the end of 2012. The tail risk has diminished as spreads have come down, the financial markets have stabilised. Economic indicators are beginning to turn positive," the Commission advisor said.

Despite the current turnaround, Pichelmann underscores the difficult situation in the labour market and the unemployment rate is likely to get worse, before it gets better this year.

"So tackling unemployment and the social consequences of the crisis will be one of the most important challenges ahead of us," he said.

Forecast errors

However, Gustav Horn, the director of the Macroeconomic Policy Institute (IMK) at the Hans-Böckler Foundation in Düsseldorf, said he had strong reservation to Commission’s general approach to this crisis.

"The Commission in its first crisis forecast announced a slight dip in GDP for 2009 and said growth will pick up again in 2010," Horn said, "and in the following period forecasts it had to revise downwards each time. The Commission always said that it will go up next year. Growth has been delayed in 2011, 2012 and 2013. Still, the Commission has the perspective that things will improve."

Horn acknowledged that everyone can commit an error, but the Commission makes them repeatedly.

"The Commission seems to keep making the same error. This is a systematic error of its policy. It has been proven that multipliers have been heavily underestimated by the EU Commission," the IMK director said.

The conclusion is that the EU is in a recession and will stay there, Horn said.

"I do not believe the forecast from the EU Commission, that we will see a change as long this approach continues. There has to be a change in the forecasts," he said.

Timeline: 
  • 22 Feb.: The winter 2013 European Economic Forecast will be published.
External links: 

Commission

Organisations

  • European Trade Union Institute: Website

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