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The public policy blog of the American Enterprise Institute
Among the more disappointing features of the European economy is that, four years after the Lehman crisis hit Europe in September 2008, its economy is yet to fully recover from that crisis. Equally disappointing is the fact that at close to 12%, Europe’s unemployment level is at its highest in over 20 years. Sadly, recent ECB and IMF forecasts support the view that Europe’s economy is likely to fare poorly over the next few years. This makes it all too likely that, like Japan before it, Europe will experience its own lost decade.
Last week, the European Central Bank slashed its economic growth forecast for the European economy. It now concedes that the overall European economy will contract by 0.4% in 2012 and by 0.3% in 2013 before it stages the mildest of recoveries in 2014. The main reason for the ECB’s gloomy forecast is the marked deepening in the economic recession in the European periphery in general and in countries like Italy and Spain in particular. These latter two countries have been contracting in 2012 at an annualized rate of 2.5% and 1.5%, respectively, and they are expected to do so again in 2013.
Among the reasons for thinking that Europe is well on its way to a lost decade is that the malaise in the European periphery is now impacting the German economy, which not only is Europe’s largest economy but also serves as its locomotive. According to the Bundesbank, the German economy itself is moving clearly into recession and will only stage the mildest of recoveries later in 2013.
At the heart of Europe’s economic troubles is its Euro straitjacket which precludes the countries in the European periphery from devaluing their currencies to boost their exports. This condemns these countries to ever deepening economic recessions as they try to address their internal and external imbalances with repeated rounds of fiscal austerity. Until Europe manages to extricate itself from its Euro straitjacket, one must expect a deepening in the European recession. Given that Europe still accounts for around 30% of the world’s overall GDP, this is hardly good news for the global economic outlook.
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