Download March 2012 - Euro Challenge

The Current Economic Situation
in the Euro Area
Presentation by
Amy Medearis and Valerie Rouxel-Laxton,
Delegation of the European Union
Webinar
March 7th, 2012
www.euro-challenge.org
1
The big picture
• The euro area economy started to
recover in 2010, but growth turned
negative toward the end of last year.
• The debt crisis started in a few small
“peripheral” countries but has affected
growth in the euro area as a whole.
• The economic crisis has become a
political crisis, too.
• But recent actions by European leaders
are helping to mitigate the crisis and lay
the foundations for growth.
Part 1 of the 3-part Euro Challenge question
Describe the current economic
situation in the euro area
(not EU)
• “Current” means the latest
available data and what
experts expect the situation
will be in the near future.
• Discussing the economic
situation using these major
economic indicators:
1. GDP growth
2. Inflation
3. Unemployment
Moderate recession forecast for 2012
Real GDP growth,
Year to year percentage change
• Mildly negative growth
(recession) forecast for
2012 (-0.3%)
(Forecasts in shaded areas)
4.0%
• GDP is expected to
recover in the course of
this year as the crisis
gradually abates
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
Euro Area (17 countries)
-3.0%
United States
-4.0%
-5.0%
2006
2007
2008
2009
2010
2011
2012
Source: Eurostat (current data), European Commission (forecasts)
2013
• Recession will be
deeper in countries most
affected by the debt
crisis; recovery will occur
sooner in countries less
directly affected.
Unemployment on the rise again
Unemployment Rate,
Year to year
(Forecasts in shaded areas)
Euro Area (17 countries)
United States
12.0%
10.0%
The unemployment rate
in the euro area is rising
again as growth slows;
it hit a euro-era high of
10.7% in January.
There are huge
differences in
unemployment rates
across euro area
countries (just 4% in
Austria but over 23% in
Spain).
8.0%
6.0%
4.0%
2.0%
0.0%
2006
2007
2008
2009
2010
2011
2012
Source: Eurostat (current data), European Commission (forecasts)
2013
Youth unemployment is
a growing challenge in
5
some countries.
Inflation: elevated but expected to come down
Inflation rate,
Year to year percentage change
(Forecasts in shaded areas)
Euro Area (17 countries)
5.0%
United States
Euro area inflation is still
relatively high due to past
increases in oil and
commodity prices
globally.
4.0%
Inflation is expected to
gradually come down due
to slower growth.
3.0%
2.0%
1.0%
0.0%
Source: Eurostat (current data), European Commission (forecasts)
2013
2012
2011
2010
2009
2008
2007
2006
-1.0%
However, it will remain
above the ECB’s target of
“close to but below 2%”
for some time, so the
ECB will continue to
monitor inflation.
6
ECB action is helping…
Mario Draghi,
ECB President
• The ECB has lowered its
benchmark interest rate to a
historically low 1.0%
• Indirect purchases of
government bonds (esp. Italy,
Spain) have helped reduce
those interest rates
• ECB lending to banks
(“LTROs”) has provided muchneeded funding to banks and
sharply decreased the risk of a
big bank going under.
… but fiscal policy is weighing on growth
• “Fiscal consolidation” is when the
government cuts spending and/or
increases taxes in order to control
deficits and debt.
• Most euro area governments do
need to control deficits and debt,
but spending cuts and tax increases
have negative effects on growth in
the short run.
• Some countries can tighten their
belts more slowly while some must
do it faster to regain investor
confidence.
Europe’s 5-point strategy to end the crisis
1. Programs for Greece
and other troubled
countries
5. Promote
sustainable growth
4. Improved fiscal rules
2. “Firewall” fund
to stop contagion
3. Restore confidence in the
banking sector
Do you think the euro will survive?
• A single monetary policy for 17 countries is
hard to manage.
• Public debt levels in some countries are
unsustainable and the belt-tightening
measures are weighing on growth and
creating social tension.
BUT
• There is a strong political commitment of
Europe’s leaders to defend the euro, and the
5-point strategy is addressing the problems.
• The euro has brought important benefits for
countries. Leaving the euro would involve
huge costs and make it harder for countries to
get their economies in shape for the future.
Additional things to know
• What does a country gain from being a
member of the European Union (27)
versus being a member of the euro area
(17)?
• The costs and benefits of adopting a
single currency
What is the mandate of the European Central
Bank?
•
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