A lost decade for Europe

The economic outlook hasn’t changed since our last Forecast. After a contraction of 0.5% in 2012 the Eurozone economy will stagnate in 2013 before growing by just 1.3% a year in 2014-16. Due to the economic environment unemployment will continue to rise throughout 2013, peaking at close to 20 million.

The Eurozone faces the consequences of a “lost decade”. Low growth numbers, uncertainty of the survival of the euro and high unemployment lies ahead. Even though uncertainty clouds the Eurozone, great progress has been made in securing the near-term future.

Businesses thus need to plan for a European “lost decade”. The Eurozone operating environment will be tough for both business and political leaders. The necessary restructuring of the Eurozone economy will, as seen in the figures, continue to dampen growth for some time.

However, significant progress towards a more secure Eurozone has been made. The European Central Bank’s policy has greatly diminished the imminent risk of a breakup. There’s also been progress made towards a banking union and the policy mix is shifting from sole focus on austerity towards measures designed to foster growth. And the risk of a Greek exit has receded since our last Forecast. At the end of 2012, the near-term future of the Eurozone seems safer than when the year started.

The EU council has revived the Growth Pact at the September meeting. The pact contains supply-side reforms that could yield large long-term benefits. The pact is also a welcome broadening of policy beyond austerity. However, it is not likely that it will to alter prospects for demand and growth on the short term. The biggest short-term boost to growth would come from removing uncertainty about the survival of the euro.

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