Eurozone GDP (gross domestic product) will have climbed back to the 2008 level by 2012, but it will be 9% lower than it would have been in a “no crisis” scenario, according to a presentation by Deutsche Bank Research.
The bank says medium-term welfare losses will linger, if unaddressed fiscal problems lead to higher inflation and interest rates
Presentation: Effects of the crisis on the real economy
Paul De Grauwe, a professor of economics at the University of Leuven/Louvain, Belgium, writes in the Financial Times today: "During much of the 1930s a number of continental European countries, the so-called gold bloc countries (France, Italy, Belgium, the Netherlands and Switzerland) kept their currencies pegged to gold. When in the early 1930s Great Britain and the US went off gold and devalued their currencies, the gold bloc countries found their currencies to be massively overvalued....It is remarkable to see that the same mistakes are being repeated today involving some of the same countries as during the 1930s. This time it is again the continental western European countries tied together in the eurozone that have seen their currency, the euro, become strongly overvalued. The two countries that in the 1930s responded to the crisis by devaluing their currencies, the US and the UK, today have also allowed their currencies to depreciate significantly."
De Grauwe says a central bank can always drive down the value of its currency by a sufficiently large increase in its supply. And that is what the US and the UK have done with their policies of quantitative easing that have gone farther in flooding the US and UK money markets with liquidity than in the euro area. "True, since the start of the crisis, the ECB has injected plenty of liquidity in the euro money markets to support the banking system. Yet it has been much more timid than the US Federal Reserve and the Bank of England in creating liquidity. While the latter more than doubled the size of their balance sheets since October 2008 and thereby more than doubled the supply of central bank money, the ECB’s balance sheet increased by less than 50 per cent," he says.
Meanwhile, the head of the Eurogroup of finance ministers, has proposed a tougher surveillance of national economies, in a letter seen Sunday by the Agence France Presse (AFP).
AFP says Eurogroup chairman Jean-Claude Juncker, in a letter to finance ministers on the eve of a meeting in Brussels expected to return him as chairman, also said he wants to boost the 16-nation area's profile in international institutions.
"The Eurogroup should pursue broader economic surveillance, both to identify individual priority issues for each of our member states and to establish a coherent framework for action to enhance the performance of the entire Eurozone economy," wrote Juncker, who is also premier of Luxembourg.
"The European Commission should not hesitate to ... address a warning to the member state" not respecting criteria and commitments, he said.
"Following the issuance of a warning by the European Commission, the Eurogroup should have a frank discussion with the member state concerned with a view to ensuring that effective action is taken."
Juncker, Europe's longest-serving leader, is widely expected to win a new 30-month mandate Monday to lead the single currency bloc.
AFP says France and other European nations, including Spain, also want to promote the idea of stronger economic governance, without anyone as yet being willing to talk specifically about "sanctions" for fiscally-wayward members.
Germany, on the other hand, is opposed to such a policy direction, fearing for the independence of the European Central Bank, in Frankfurt.
On the international front, an idea being actively pursued by many including incoming EU economic and monetary affairs commissioner, Olli Rehn, is for the Eurogroup to seek its own seat at G-20 and International Monetary Fund meetings.
