Eurozone growth forecast lowered; details on Greece and Italy's new interim governments

Updated On: Nov 11, 2011

The European Commission has cut its growth forecast for the Eurozone in 2012, warning that growth has stalled and there is a risk of a new recession. Meanwhile, Greece has confirmed the country's new interim Prime Minister, and details have also emerged about Italy's expected new leader. Separately, German Chancellor Angela Merkel has denied reports that Germany and France are discussing the possibility of countries leaving the euro area.

Eurozone Growth Forecast

The European Commission has cut its euro area growth forecast for 2012 from 1.8 percent down to just 0.5 percent.

Growth for 2011 will be just 1.5 percent. The Commission expects the euro economies to contract 0.1 percent quarter-on-quarter in the last three months of 2011 and sees zero growth quarter-on-quarter in the first three months of 2012.

The low growth makes it harder for Europe to escape its debt crisis, with Italy's position seen as unsustainable.

“This forecast is in fact the last wake-up call,” said Olli Rehn, the European Commissioner for economic and monetary affairs.

The Commission believes the probability of a more protracted period of stagnation is high, and a prolonged recession cannot be ruled out given high uncertainty over key policy decisions.

Mr. Rehn is rarely prone to hyperbole. Even Germany, the economic engine of Europe, is now expected to record just 0.8 percent growth in 2012, more than a percentage point lower than the European Commission predicted in its spring forecast. And none of the other three big economies that use the euro — France, Italy and Spain — are projected to achieve 1 percent growth in 2012.

Portugal, which was forced to ask for a bailout this year, is contracting so fast that it might not be able to meet its financial goals. The new forecast is for Portugal to have negative growth of 3 percent for 2012, worse than the minus 1.8 percent predicted earlier. This is even worse than Greece, whose economy is expected to shrink by 2.8 percent in 2012.

That said, the European Commission does forecast growth for the region picking up to 1.3 percent in 2013.

But in the near term, debt levels in the euro area will increase - from an average 88 percent of gross domestic product in 2011 to 90.4 percent in 2012 and 90.9 percent the following year, with Greece and Italy doing much worse.

The commission’s report underscores the risk that austerity measures could send euro economies into a downward spiral. To stimulate growth, the European Commission wants to press structural reforms like liberalizing labour markets and relaxing restrictions that can create market inefficiencies.

Report: Europe’s Growth Forecast Is Lowered [New York Times, 10 Nov 2011]

Report: EU sees euro zone growth slowing sharply, recession risk [Reuters, 10 Nov 2011]

Report: Eurozone's growth has stalled, says EU [BBC, 10 Nov 2011]

Greece Announces Interim Prime Minister

Economist Lucas Papademos will be Greece’s next prime minister, giving a non-politician the job of passing an unpopular bailout plan before elections are held next year.

The selection ended four days of squabbling among the country’s bitterly divided political parties over how to structure a unity government. Mr. Papademos and the rest of the interim government are to be installed on Friday.

Mr. Papademos is the former vice president of the European Central Bank, and is widely seen as an able, if uncharismatic, bridge between Greece and its creditors.

He has promised to push through the austerity measures that are a condition of the European Union's bailout plan announced at the end of October.

Report: Economist Lucas Papademos to lead Greece’s unity government [Washington Post, 10 Nov 2011]

Italy Votes on Austerity Measures

Italy's parliament is also voting on Friday for austerity measures demanded by the European Union. A new emergency government is expected within days, ending the Berlusconi era.

The austerity package is expected to pass easily.

Voting for the first time in the upper house will be Mario Monti, the former European Commissioner who has emerged as favourite to replace Prime Minister Silvio Berlusconi. Italian President Giorgio Napolitano made Mr. Monti a life senator yesterday, in a surprise move that raised his already high profile and instantly made him a legislator.

Mr. Berlusconi has promised to resign after the financial stability law is passed by both houses of parliament.

If all goes well, the new economic measures will receive final approval on Saturday. This means Mr. Berlusconi may step down as early as Saturday night, giving Mr. Monti the mandate to form a new government afterwards. Some commentators say the new government could be in place as early as Sunday, before markets open on Monday.

Mr. Monti, who is currently head of Milan's prestigious Bocconi university, is a tough negotiator with a record of taking on powerful corporate interests as European Competition Commissioner.

Report: Italy's Senate set to vote for cuts to save euro zone [Reuters, 10 Nov 2011]

Germany Aims to Keep Eurozone Together

German Chancellor Angela Merkel says Germany's goal is to stabilise the Eurozone in its current form.

Her comments followed an earlier report that Germany and France were discussing a radical overhaul of the EU, possibly with a smaller Eurozone.

But Mrs Merkel said the whole group needed to restore credibility.

"We have a single goal and it is to stabilise the Eurozone as it is today, to make it more competitive, to make progress in balancing budgets," she said, when asked about the possibility of debt-laden Italy leaving the bloc.

"We believe this common euro area is also capable of thoroughly winning back its credibility, that means for every single country," she said.

Report: Merkel: Aim is credibility for whole eurozone [BBC, 10 Nov 2011]

Effects on Germany

Finally, the next print edition of The Economist is looking at how the crisis in the euro economies is affecting Germany, the continent's biggest economy. The Economist's conclusion is that Germany is not melting down, but it is slowing down.

German exports are surprisingly buoyant considering the European pandemonium; they rose by 0.9 percent in September. But industrial production dropped by 2.7 percent in September and new orders, a harbinger of future output, fell by 4.3 percent, the third monthly decline in a row. The crisis is playing havoc with Germany's trading partners in Western Europe, and demand is also waning from Germany's growing markets of Asia and Eastern Europe.

Exports make up around half of the country’s GDP, so a slowdown is inevitable. But Germany's labour market is strong. Unemployment barely rose during the 2008-09 recession. With the recovery, it has dropped to a 20-year low, and employment is expected to remain resilient despite the current downturn.

But if German unemployment does rise, this would jeopardise Mrs. Merkel’s chances for re-election in September 2013. Perhaps for that reason, many analysts expect she will eventually take stronger action to stem the present crisis in Europe.

Analysis: A case of the sniffles [The Economist, 12 Nov 2011]

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