Author: Nicolaus Heinen (+49) 69 910-31713
November 12, 2012
The autumn forecast released by the European Commission on November 7 is more than simply a collection of numbers. It will also influence the economic policy agenda in the EU and the eurozone. France remains a source of concern.
The autumn forecast paints a mixed picture: the position of the countries stricken by the euro crisis has deteriorated versus the spring forecast.
Budget and current account deficits as well as unemployment may be reduced in the medium term via higher growth. One prerequisite for this is an increase in price competitiveness in the crisis countries which, in a monetary union with fixed exchange rates vis-à-vis the other union members, can only be achieved via a devaluation in real terms. A look at the real effective exchange rates shows that this real devaluation in the crisis countries is likely to be much more pronounced than forecast as recently as spring. However: to create growth in crisis countries, this on its own is not enough – especially not if risks to global growth keep a lid on exports and structural reforms fail to create confidence and attract investors to the extent desired. And this is why the Commission has revised down its growth forecasts for most countries (except for Germany). According to the Commission, the eurozone economy will expand by only 0.1% in 2013 – a 0.9 percentage point correction since spring.
France in particular is a cause for concern. France's economy is in the doldrums, with still poor growth prospects and weak export development. Back in spring the Commission had (in its Alert Mechanism Report) already criticised a lack of price and non-price competitiveness, declining shares in world export markets, unprofitable enterprises and low investment incentives. France is forecast to run a deficit of over 3.5% for 2013 and 2014 – this is a far cry from the French government's original target of returning the budget deficit to below the Maastricht benchmark in 2013. There is no sign of relief in sight: discussions over the recent proposal by the Gallois Commission, which would like to make France more competitive via supply-side reforms, are unlikely to produce a compromise. At least an initial understanding has been reached on corporate relief to the tune of EUR 10 bn – a zero-sum game for the time being, since corporate taxes were temporarily increased last summer as part of a consolidation package. Nobody dares to call into question the statutory 35-hour working week.
The autumn forecast is more than simply a collection of numbers. It will directly influence the economic policy of the EU member states – via three different channels.
Even if it were to stand firm: a look at the table shows that seven of the 17 eurozone members are off target. If France were among them, powerful coalitions could soon be formed to thwart an early warning or sanctions by virtue of a qualified majority. Thus, it is to be feared that, despite the promising revamp it underwent last year, the Stability and Growth Pact might not be applied as rigorously as hoped.
It appears that Europe is currently at least as far away from having the potential to impose credible sanctions on budget offenders as it is from achieving consistently sound budget figures.
Author: Nicolaus Heinen (+49) 69 910-31713
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