Bloomberg News

Global Growth to Slow as Euro Area ‘Muddles Through,’ EEAG Says

February 27, 2012

Feb. 27 (Bloomberg) -- Global economic growth will slow this year and the euro area faces a “long and painful” recovery from the debt crisis, CESifo’s European Economic Advisory Group said.

The global economy will expand 3.3 percent after 3.8 percent growth in 2011, the EEAG said in a report released in Brussels today. The euro area will contract 0.2 percent after expanding 1.5 percent last year, it said.

“It is impossible to predict how the euro crisis will develop,” the group of economists that includes Hans-Werner Sinn of the Ifo institute said in the report. “Our hope is that the euro area will be able to ‘muddle through,’ but we fear that the process will be long and painful.”

European leaders, fighting a debt crisis that is in its third year, agreed last week on a second bailout and a debt writedown for Greece. U.S. Treasury Secretary Timothy F. Geithner said on Feb. 25 that Europe must step up its actions and render its crisis-fighting commitments “credible,” a call German Finance Minister Wolfgang Schaeuble rebuffed, saying the Greek deal showed that Europe is doing enough.

The EEAG sees Germany’s economy growing 0.4 percent this year and forecast contractions of 0.3 percent in France and 0.6 percent in both Italy and Spain. The U.S., the world’s largest economy, will expand 1.9 percent this year after 1.7 percent growth in 2011, the group said.

“Continuing deadlock in Congress and the upcoming presidential election are sources of great uncertainty,” it said. “But the healthy corporate profits generated particularly by large companies, combined with low interest rates, will raise the country’s growth rate, after a slowdown during the first half of 2012.”

Financial Regulation

On banking regulation, the EEAG said the European Union system is multinational, “has no direct control over policy instruments and can only issue warnings.” In that context, mirroring the U.K. model that will put macro-prudential and micro-prudential control at the Bank of England “seems sensible.”

It suggested a “possible configuration” for the euro region of putting the European Systemic Risk Board and the European Banking Authority as a subsidiary “under the wing” of the European Central Bank and keeping the European Securities and Markets Authority independent.

“This would put macro-prudential supervision in the hands of the ECB and would ensure coordination and information exchange with the prudential authority, as well as a clear line of authority in a crisis situation,” it said.

--Editors: Fergal O’Brien, Eddie Buckle

To contact the reporters on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net; Rebecca Christie in Brussels at rchristie4@bloomberg.net

To contact the editor responsible for this story: Matthew Brockett at mbrockett1@bloomberg.net


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