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Euro Area Malaise
The pace of economic recovery in the Eurozone is yet to gain momentum. Real Gross Domestic Product, which is the gross income of the entire region, rose by 0.1% in 2013, following a decrease of 0.4% in 2012. However, according to the latest projections of the European Central Bank, “a gradual recovery in domestic and external demand is expected to be the driving factor behind the projected sustained increase in activity in 2014.”
Let’s not forget that the financial crisis has had a permanent impact on the Gross Domestic Product of the region. Real Gross Domestic Product (GDP) collapsed by 4.2% in 2009, which is equivalent to EUR0.7tn. Overall, the crisis permanently shifted the Eurozone’s output downwards by 5% and the European Commission projects that the output could return to its pre-crisis level only in 2022.
Consequently, full economic recovery is no longer an option for the policy makers within the region. The gradual and sustainable increase in activity in 2014 crucially depends on the expansion of government expenditure and domestic consumption, which are key components of domestic demand.
Government expenditure contracted in 2012 following pressure from private investors, the International Monetary Fund (IMF) and Germany. According to the European Banking Federation, loans generated from the financial sector to European governments have been following a declining trajectory by historical standards. Loans to governments contracted by 4.4% in 2011. This is in line with the contraction in public expenditure across the Eurozone. Consequently, as a component of the demand, government expenditure in 2014 is unlikely to be a positive factor boosting the economy. Conversely, it will contribute to a reduction in the aggregate demand in 2014.
MarketLine analysis using Eurostat data suggests that real income expanded by approximately 0.5% from 2008 to 2012, which contrasts with an expansion of roughly 3% before the Great Economic crisis of 2008. With an income rate of growth reduced by 2.5%, it seems to be unlikely that the gradual and sustainable recovery will come from the expansion of domestic consumption.
With these measures, the Eurozone is still facing acute difficulties to balance its economy towards a sustained increase in activity. Domestic demand is yet to show robust signs of recovery. The financial crisis is indeed having a profound impact on the recovery of the Eurozone.
Read more in our ‘EU Financial System Out of Control: Full economic recovery path – not an option’ case study.