Private consumption and government spending shore up the economy throughout Europe

Most countries of the European Union have been hit by the worldwide recession. The economy in the Eurozone will contract by 2.0 percent this year. This is the conclusion of the latest report of the international group of economists - - the European Economic Advisory Group (EEAG)  - -of which the President of the German Ifo Institute for Economic Reseach, Prof Hans-Werner Sinn is also a member. Although GDP in the Eurozone will expand again in 2010 at a slow pace of 0.2 percent, unemployment will continue to rise. In contrast to past downturns, the contraction in one country will not be offset by growth in another, since the whole Western world has been hit by the recession.

Because of its dependency on exports, Germany, in comparison to other countries, will be particularly hard hit by the recession. For Germany the EEAG experts forecast a contraction of 2.4 percent, which without the economic stimulus package of the German government would have amounted to 3.2 percent. Unemployment in September will be a half a million higher than in September 2008 and will rise considerably more into the winter. Because of cautious wage settlements in past years German workers were able to improve their competitiveness somewhat so that the impact on the labour market in 2010 will presumably not be as strong as in 2005.

The economic experts have also made policy recommendations for dealing with the current financial crisis centred around the regulation of financial institutions and international financial market structures. Minimum capital reserve requirements, for example, should be clearly raised and extended to all bank-like institutions. A refined definition of value at risk should be introduced that includes high liquidity premiums and stock market bubbles. The experts also recommend a common financial market regulation system and a supervisory body at the European level

The crisis has rekindled the on-going debate over types of financing. In addition to the many innovations that have been introduced in the past two decades, especially the private equity firms have been subject to increasingly critical examination. The EEAG sees no systemic risk from these firms. Economic systems need different types of capital, and public regulators should let the market decide as to what sources are most adequate for the firms.

The European Economic Advisory Group (EEAG) at CESifo was founded in Munich in 2001 on the initiative of Hans-Werner Sinn. The eight economists from seven European countries are an international expert group for the analysis of European economic developments and publish an annual report on the state of the European economy. The report is presented to the public at a press conference in Brussels and in a number of European capitals. In addition to an economic forecast, which includes all 27 countries of the European Union and specifically the Eurozone, the report also examines other economic topics. This year the focus is on the financial crisis, private equity firms and the French economy.

The EEAG Report 2009

EEAG Group: Gilles Saint-Paul (University of Toulouse, chairman), Giancarlo Corsetti (European University Institute, Florence), Michael Devereux (University of Oxford), John Hassler (Stockholm University), Tim Jenkinson (University of Oxford), Hans-Werner Sinn (Ifo Institute for Economic Research and University of Munich), Jan-Egbert Sturm (ETH Zurich - Swiss Institute of Technology, KOF - Swiss Economic Institute).