Research Dept. News
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Monthly Report, num 352 - December 2011
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European union - Euro area
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The euro area: changes and uncertainty
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Important political changes occur in Greece, Italy and Spain.
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The following phrase is attributed to the diplomat Henry Kissinger, who served as Secretary of State for Presidents Nixon and Ford: «Who do I call if I want to call Europe?». At the end of 2011, the answer to this question consists of providing some yellow pages with the telephone number of 27 foreign offices, of the main bodies of the European Union (EU) and other European institutions. And the fact is that all these organizations are putting forward proposals, almost on a daily basis, of how to resolve the crisis in the European Union. In other words, lack of coordination seems to be the order of the day.
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At a European level, debate continues on Euro bonds, the role of the ECB and the need for greater fiscal integration.
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However, it would be mistaken to think that this division means the status quo is being maintained. Intense political changes are actually taking place. Among which we should note the changes in government in Greece, Italy and Spain. In Greece, Lucas Papademos, a former member of the European Central Bank (ECB), has replaced Giorgios Papandreu as the prime minister, forming a national, provisional coalition government. This government's aim is to implement the reforms agreed with the European Commission (EC) and to clear the way for new elections. On the other hand, in Italy, after the resignation of Silvio Berlusconi, the president of the country, Giorgio Napolitano, charged Mario Monti, a former European commissionaire, with forming a new government of technocrats whose mission will be to implement structural reforms and apply measures that ensure the solvency of public finances. In the case of Spain, the outcome of the general elections has also led to a change in government.
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Although these measures are unlikely to calm the tensions in financial markets in the short term.
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Significant changes at a European level are also still being debated, with three being particularly of note. The first, proposed by the president of the European Commission, José Manuel Barroso, consists of the creation of Euro bonds. An EC study argues that Euro bonds would allow a deep public debt market to be created that could compete with that of the United States and would resolve the financing difficulties of member countries of the euro area. The second is the possibility of the European Central Bank becoming more involved in resolving the crisis: intervening more fully in the euro area's public debt markets.
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Lastly, Herman van Rompuy, president of the European Council, has proposed as a solution the adoption of greater European integration in terms of member countries giving up more sovereignty, strengthening the rules and mechanisms of fiscal accountability.
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But although the list of measures is long, they are unlikely to reduce tensions in the debt markets immediately. The credibility of the different governments has been severely damaged, so markets will want to make sure these measures are approved and applied correctly. Given that they are far-reaching structural reforms, they cannot be carried out quickly and, in any case, the effects will not begin to be noticed until some time has passed.
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Tensions in the debt markets reach countries such as France, Austria and Belgium.
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Given this situation, instead of tensions abating in the debt markets they have now reached countries such as France, Austria and Belgium. One of the great questions is how this might affect the real economy. In this respect, the third quarter figures for the gross domestic product (GDP) are not very heartening. In quarter-on-quarter terms, this grew by 0.2%, resulting in a 1.4% year-on-year rate of change. However, macroeconomic indicators are producing worrying signs, pointing to a slowdown in economic activity for the coming quarters.
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Macroeconomic data continue to show weakness.
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Retail sales for the month of September fell by 1.3% year-on-year, accentuating the weakness of the third quarter this year. This fall continues the downward trend in the consumer confidence index which, in October, reached a new low of 19.9 points. There are three factors weighing heavy on consumer mood. Firstly, political uncertainty. Secondly, job losses, resulting in higher unemployment in the euro area in September, up to 10.2%. Lastly, the reduction in household disposable income, whose earnings are growing at a slower rate than inflation.
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Regarding supply, industrial production in September presented year-on-year growth of 2.2%, a considerable fall from the 6% of the previous month. Political uncertainty is also affecting the business sector, already hard hit by its problems in accessing credit and sluggish demand. Moreover, this fall in industrial production is likely to get worse, as the business confidence index for October dropped to 94.8 points from its level of 98.9 in the third quarter, reflecting the aforementioned factors.
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All these reasons have led us to considerably reduce our growth forecast for the euro area for 2012. Our previous GDP forecast of 1.3% has been lowered to 0.3%. The risk of the euro area entering a moderate recession is high, having had two consecutive quarters of negative growth, as we were reminded by the president of the European Central Bank himself, Mario Draghi, in his appearance in November. We have also lowered our consumer price index (CPI) forecast for the coming year by two tenths of a percentage point, from 1.8% to 1.6%.
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We lower our 2012 growth forecast for the euro area to 0.3%.
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In summary, the economic trend over the coming quarters will probably be negatively affected by the uncertainty generated this year in the interminable political discussions to find a solution to the euro area's sovereign debt crisis. Now, it would be crucial to be able to reply to Henry Kissinger's question, answering that there are several telephone numbers but a single voice to ensure that economic growth won't suffer any more setbacks in the coming year.
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