Recovery in Euro Area Seen Falling Behind Schedule


In the first quarter of 2010, the Euro Area economy expanded 0.2%, supported mainly by exports and government spending. Yet, new austerity measures put on place by many member countries in order to fight fiscal deficit may push the recovery even more behind schedule.

Indeed, the euro zone's jobless rate reached 10.1% in April, the highest in almost fourteen years. And without growth in employment we can't count on recovery in domestic demand. For example, consumer confidence fell to a seven-month low in May and retail sales were down 1.2% in April. Also, it is likely that austerity measures put on place by countries with high fiscal deficits in connection with the end of fiscal stimulus may depress consumer spending and slow down the recovery even more.
 
Looking further, the recent surge in exports caused by a weak common currency may not influence the overall economy as much as expected. In fact, countries which are benefiting the most from favorable terms of trade are those which economic situation is relatively stable like Germany, Netherlands and Finland. Yet, Greece, Portugal or Spain which are mired in fiscal deficits and which growth is dependent primarily on consumer demand will only marginally take advantage of a depreciating euro. In fact,  a lower euro exchange rate is making them pay more for imports and may eventually lead to inflation when what those countries really need is low interest rates.


TradingEconomics.com, Bloomberg
6/9/2010 10:36:47 AM