Eurozone – time for a new approach, reflections on the June 2013 Ernst & Young/Oxford Economics Eurozone forecast


A continuing struggle

 There is little positive news from the Eurozone: the Ernst & Young Eurozone economic forecast released today confirms how challenging the situation continues to be. GDP is forecast to decline by 0.6% in 2013, slightly more than the fall in 2012, before starting a gradual recovery from 2014. Unemployment is still rising: the forecast is for total unemployment to peak at around 20.5 million people, a staggering human cost.


Businesses, especially those outside of the Eurozone, are suffering from “forecast fatigue” and are very sceptical of any suggestions that things are going to improve. The “hockey stick” forecast recovery has consistently failed to materialize and each incorrect forecast makes it even harder to convince the providers of capital that things have changed. Countries such as Greece, Spain and Portugal are implementing reform but they are receiving little credit for their efforts as this is being lost in the overall gloom.

 The European economic crisis is now damaging long term economic potential of the continent. Both physical and human assets are being allowed to decline and insufficient new resources are being provided. Something needs to change, and quickly. Businesses need to engage with governments to press for more radical action.


Time for a change in policy

European policy makers have focused on avoiding the collapse of the Eurozone. However this focus on macroeconomic stability is distracting attention from the real economy and the decline in Europe’s overall competitiveness and attractiveness. The Eurozone may well eventually emerge with a reformed banking sector and a new fiscal regime but this could be an economy with an unemployed workforce with a lack of productive capital. To the outside investor, Europe offers weak demand and low productivity: a potentially disastrous combination.


The Eurozone is stuck in recession at a time when the world economy is going through a major transformation. China is reshaping its economy, the USA is benefitting from the emergence of shale gas, and other megatrends include: the reshoring of manufacturing: the emergence of new growth sectors; and relentless improvements in productivity. This is not a time to watch from the sidelines: European business and government need to be working in partnership.


Europe needs to look beyond its internal economic challenges and see what is happening in the rest of the world. The USA, the UK and most recently Japan have all adopted unconventional policy responses to stimulate their economies. Europe is not facing a conventional recession and must be willing to try new approaches. On the occasions when innovative approaches have been tried such as the LTRO and OMT, the results have been positive. Now is the time for Europe to be bolder still.


Confidence needs to be rebuilt quickly and this means stimulating demand and buying the time necessary to drive through the necessary structural reforms. These changes are not mutually exclusive and in fact they must be implemented in tandem. Joined up policy is essential if Europe is to build a competitive economy fit for the future.


Our panel discussion on the possible solutions was full of energy and we identified a number of areas for action:


  • Much of the reform agenda has focused on reform of labour markets but it is as important to drive change in product and service markets to create opportunities for growth, this is especially true in the core countries where the pressure for reform has been less to date than in the periphery.


  • Having shored up the financial markets, the next step must be for the ECB to incentivize increased lending at competitive rates, especially to small and medium sized enterprises.


  • The Austerity regime should be relaxed – the scenario modelled by Oxford Economics shows that halving the Austerity measures currently planned could raise Eurozone GDP by 1% in 2014, with Greece and Spain gaining most. Over time debt must be brought under control but a credible long term fiscal plan is what matters most.


  • Urgent attention must be given to youth unemployment. Policy makers need to consider how to get young people into work and to avoid the risk of a lost generation. Tax incentives, employment subsidies, apprentice schemes and other measures all merit review.


  • Europe must look to stimulate innovation and entrepreneurship. Beyond funding, entrepreneurs consistently identify taxation and regulation as key barriers. Policy makers need to renew their efforts to reduce barriers to growth.



With other regions showing positive momentum, Europe cannot afford to continue to look inwards and pursue austerity while ignoring the changes in the world economy. A longer term strategy is required which starts with initiatives to stimulate growth and to attract investment in key sectors. This requires government and business to working together, sharing ideas and resources.





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