Adjustment and Trade in the Euro Area

By Eyd, Ali Al-; Gottschalk, Sylvia | National Institute Economic Review, July 2005 | Go to article overview

Adjustment and Trade in the Euro Area


Eyd, Ali Al-, Gottschalk, Sylvia, National Institute Economic Review


Economic growth in the Euro Area remains rather weak, slowing from 1.7 per cent in 2004 to a forecast rate of 1.5 per cent in 2005 before rising to 2.0 per cent in 2006. We see much of the weakness driven by poor supply side performance, with our estimate of trend growth being around 1.6 per cent. Labour market problems in Germany, in part as a consequence of unification, have probably reduced trend growth to just above 1 per cent, whilst trade liberalisation has changed the structure of the Italian economy, and has probably reduced trend growth to around 1 per cent. Further evidence of slow supply side growth has been the increase in inflationary indicators that have been seen as a consequence of the 5 per cent fall in the euro that we have seen since the beginning of 2005. This, in combination with higher oil prices, has led us to revise up our inflation forecast for 2005 by more than 1/2 a per cent. However, a weaker euro is a factor behind strengthening growth in Germany. We expect Euro Area consumption growth to remain flat this year at just over 1 1/4 per cent and to rise modestly to about 1 3/4 per cent per annum over the medium term.

Risks to this forecast remain largely on the downside and stem not only from high oil prices and sustained global imbalances, but also from the apparent paralysis in policymaking that has beset Europe in the wake of recent economic and political shocks. These include, notably, the "No" votes to the European Constitution in France and the Netherlands as well as the breakdown in European budget negotiations last month. In addition the Stability and Growth Pact constrains slow growing countries such as Italy, the Netherlands and Portugal, from using active fiscal policy as a counter measure.

The outlook for European growth outside the Euro Area has also been revised down for this year, but remains more solid over the medium term. Marked downward revisions to annual growth rates in the UK and Sweden have contributed to a reduction in our EU-25 growth projection from 2 per cent to just over 1 1/2 per cent for 2005. Indeed, on June 20th the Riksbank lowered its policy interest rate by 50 basis points to 1 1/2 per cent in an attempt to combat a widespread slowdown in the Swedish economy. The authorities noted that a weak labour market and a fall in both public and private consumption were among the main macroeconomic components to erode at the turn of this year. However, this will help to keep annual inflation comfortably below the Riksbank's target of 2 per cent until the economy rebounds. Further spare capacity will evolve over the course of this year and next since a bleak outlook for the Euro Area will see a slowdown in Swedish exports to that region. The aggressive policy move by the Riksbank is seen by many to underscore its independence from actions taken by the ECB, especially in the face of Sweden's growing ties with the Euro Area.

Exports from the European Union's new member countries also face a weakened short term outlook resulting from slow growth in the Euro Area as well as from recent strengthening of their currencies against the euro, most notably in the Polish zloty and the Hungarian forint. However, the dynamic nature of these economies should help to ensure that overall growth in the medium term remains supported by robust investment and moderate consumption, where restraint in the latter component will improve large current account imbalances. We expect growth in this region to dip this year averaging around 3 1/2 per cent, year-on-year, before posting a strong recovery next year and settling around 4 3/4 per cent per annum over the medium term.

The downward revision in Euro Area growth is due to a number of factors, both country-specific and area-wide. Recessions have materialized in both Italy and the Netherlands with recent revisions to GDP figures uncovering two consecutive quarters of negative growth in each country that spanned the turn of this year. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Adjustment and Trade in the Euro Area
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.