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1 EURO CRISIS : IS 2013 THE END OT IT ? By Prof Phil H. Latimier du Clésieux The global economy took a sharp turn for the worse following the collapse of Lehman Brothers in September 2008. After five years of economic crisis, it is increasingly apparent that the global economy is still slowing and weakening. The key reasons for the lack of recovery are the private sector deleveraging, the fiscal consolidation, the euro area crisis and the emerging markets economies (EMEs) slowdown. The economic outlook for 2013 is not that much different than it was a year ago: Europe seems to be in Japan’s footsteps with key European countries entering a recession that is now having an impact worldwide. 2 The continuing euro area crisis is dampening global confidence, weakening trade and employment and slowing economic growth for OECD and non-OECD countries alike. Today, the risk of a new major contraction cannot be ruled out. Because deficit and debt reductions require economic growth, fiscal consolidation needs to be as growth-friendly as possible. That said, the outlook as reflected by the real GDP growth in per cent for 2012 and 2013* clearly indicates that a recession is ongoing in the euro area : - 0.1% Vs -0.4%. The US economy is growing (2.2% in 2012* ) but a slowdown is still expected to surface in 2013 ( 2.0%*). The Japanese economy is also projected to contract from 1.6%* in 2012 down to 0.7%* in 2013 while growth is slowing in 2012 in many emerging market economies such as Brazil, China, India, Indonesia, South Africa and the Russian Federation. A number of downside risks threaten the outlook, including the potential for further increases to already high oil prices, excessive fiscal contraction and further declines in consumer confidence linked to persistent unemployment. The road to recovery is a tough one, and strong leadership and resolute collective commitment to change are definitely needed to unblock progress in 2013. 3 We need to re-inject hope and confidence but the crisis in the euro area is being sustained by three negative feedback loops that amplify shocks : 1. Solvency fears for banks are feeding on each other due to government guarantees for banks and bank holdings of government bonds. 2. The possibility of exit from monetary union pushes up yields, which in turn reinforces breakup fears. 3. Worries about government debt are also driving up yields, which further weigh on debt dynamics. As per the recommendations of OECD, a positive policy response is possible and should be based on the full use of available policy levers : monetary, fiscal , and structural. The monetary policy stance should be further eased in many economies. Excessive near-term fiscal consolidation should be avoided. Structural policies should be fully activated in many countries in order to boost growth and generate sustainable current account rebalancing, especially in the euro area. When it comes to the euro area, we also believe it is necessary to break the feedback loop between the banks and the governments as well as the feedback loop between the exit risk and the bond yields and debt sustainability. In that regards, progress towards a 4 fully fledged banking union is essential to complete the architecture of the euro area and to facilitate disentangling sovereign and banking sectors fragilities. We at ITALIE-FRANCE.COM also firmly support the idea that growth could be boosted by an ambitious “Marshall Plan” in EUROPE based on jumbo Infrastructure Projects fully funded by callable bonds : Such bonds would be underwritten by tax-payers and international investors and would be issued with the non- revocable and unconditional guarantee of the ECB. With a general government debt which came to 94.1% of GDP compared with 65.6% in 2000 plus a 9.8% unemployment rate in FRANCE, with a general government debt which came to 102.4% of GDP, up from 39.4% in 2000 plus an unemployment rate that more than tripled in the past decade from 4.2% to 13.7% in ITALIE, We at ITALIE-FRANCE.COM definitely believe that steadfast action is essential to unblock the situation in the short run. SOURCE : OECD Yearbook 2012 + Economic Outlooks 2012 5 PHLDUCX December 5th, 2012.