EUROFRAME Economic Assessment of the Euro Area

26 November 2010

EUROFRAME: Economic Assessment of the Euro Area, November 2010

The ESRI is one of ten independent research institutes in EUROFRAME, an EU network which undertakes macroeconomic analysis and forecasting. The other nine institutes in the network are: CPB (Netherlands), DIW Berlin (Germany), ETLA (Finland), The Kiel Institute for the World Economy (Germany), NIESR (United Kingdom), OFCE (France), PROMETEIA (Italy), WIFO (Austria) and CASE (Poland). Today sees the launch of the EUROFRAME Group's latest report giving GDP and inflation projections for the Euro Area to 2012. The report also contains projections of key economic variables for the major EU countries and the US. It analyses the effects on the Euro Area of the fiscal consolidation measures implemented over the period 2010-2012. Among the findings contained in the report are the following:

• On the basis of the latest available data, EUROFRAME forecast a tentative recovery in the Euro Area with GDP increasing by +1.6% in 2011 and +1.7% in 2012. The gradual weakening of the recovery seen in recent months is expected to continue into 2011 with a modest acceleration in growth anticipated in 2012 as economic conditions gradually improve.
• There are several reasons for this relatively modest upturn, including the unwinding of fiscal and monetary stimulus packages, limited domestic demand growth in key trading partner countries, continued adjustment of household balance sheets and the implementation of austerity measures to reduce large fiscal deficits in many advanced economies.
• The report contains the results of a simulation exercise which estimates the effects of fiscal policy changes on GDP in the Euro Area. The planned consolidation measures for 2011-12 improve the public finances in the Euro Area by 1.7 per cent of GDP but reduce GDP growth by about ½ percentage point in both 2011 and 2012.
• The forecasts contained in this report are critically based on the assumption that the European sovereign debt crisis is contained and is resolved swiftly. It is hoped that the authorities' recent intervention in Ireland will prevent further contagion. Nonetheless, there remains considerable uncertainty which, if not resolved, could have a negative impact on the Euro Area economy.
• Labour market conditions in the Euro Area are expected to remain challenging over the forecast horizon with the unemployment rate projected to stand at 9.7 per cent in 2012. The case of Germany illustrates the importance of wage moderation in reducing the unemployment rate.
• Given the moderate outlook for inflation, the ECB is expected to raise the main refinancing rate slowly in the course of 2011 and 2012 in line with the forecast recovery. We anticipate the ECB will raise the main refinancing rate to 1.6 per cent by the end of 2012.

Note to Editors: 1. EUROFRAME: Economic Assessment of the Euro Area, November 2010, by John Fitz Gerald, Thomas Conefrey, Adele Bergin (ESRI), CASE (Poland), CPB (Netherlands), DIW Berlin (Germany), ETLA (Finland), The Kiel Institute for the World Economy (Germany), NIESR (United Kingdom), OFCE (France), PROMETEIA (Italy), WIFO (Austria), will be published online at 00:01 a.m. on Friday 26 November.

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