Worst omens for the EU economy, yet no action at bay

Angela Merkel1

Mario Monti Mariano Rajoy

The EU Commission has pictured last week a devastating outlook for the European economy. Yet Commissioner Olli Rehn has staunchly hailed austerity and budget tightening as the best way forward. He depicts public finance imbalances as the main hurdle in anchoring recovery…in the long run. Alarm bells on a foreseeable downturn next year do not seem to move the Commission in taking action to invigorate an ailing EU output. Plans for growth and jobs are either being shelved or ignored.

The European Central Bank also warned last week on a downside risk leading the economy to outright recession. Yet it left unchanged its monetary stance, with no tips on further rate reductions or a QE scheme to address the sluggish economic performance.

With Euro partners becoming entangled in a tug-of-war on ancillary issues such as the banking union, there is little hope to agree on a common strategy to tackle the growth gap. If the fiscal cliff across the Atlantic seems an awesome challenge, the free fall Europe might experience in the coming months might lead to a worse shock. Yet only limited funding has been earmarked for supporting a number of EU-wide infrastructure projects. A mere drop of water in the ocean of economic drought to come.

Europe seems unable to cope with a recessionary outlook. It lacks a monetary policy fully committed to save the day. Worse than that, as the euro model rests on a strict neutral fiscal stance in every country, it feels helpless in delivering  any combined stimulus to redress any sizeable growth failure.

The Euro zone desperately needs a major overhaul in its policy-mix, involving a decisive move towards economic union. Countries in a better shape, like Germany, should refrain from enforcing a fiscal balance, aiming instead to provide enough stamina to European demand. Extra common funds should be put in place in supporting investment and job creation. Budget mutualising, however limited in scope, should be swiftly implemented to avoid public debt from spinning out of control.

Nothing of the sort is likely to be enforced. Thus, Europe is bound to drift into deep waters with little hope to regain the safe shore. It will undergo extensive damage before any hope of a slight recovery is at bay. That is the price to pay when you lack a common economic policy to ensure monetary union works in a smooth way when confronted to rough times.

About the Author

JP Marin Arrese
Juan Pedro Marín Arrese is a Madrid-based economic analyst and observer. He regularly publishes articles in the Spanish leading financial newspaper 'Expansión'.

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