The Euro Area is Not Heading to a Sustainable Recovery

The Euro Area economy probably returned to positive growth in the third quarter of 2009. However, the recovery may not be sustainable because of rising unemployment and scarce credit availability.

Indeed, the Euro Area unemployment rate reached 9.6% in August, the highest since introduction of the euro. And although the sustainability of the recovery doesn’t necessary require stabilization in the labor market, the jobless rate will be a major drag for the Euro Area economy. In fact, if the unemployment continues to grow, people are likely to cut spending even further. In addition, the end of fiscal stimulus which peaked in the third quarter of 2009 may damage confidence and lower capital investments. Also, households hit by the recession and now afraid to spend and we should not underestimate the effect of a rising savings rate.

More importantly, many financial institutions continue reluctant to lend as current rates don’t assure profit adequate to the involved risk and they prefer to accumulate reserves for worst times. In one hand, the expansionary monetary policy has put interest rates at historic lows. However, in the other hand, the meltdown of the banking system has congested lending channels and capital investments which fell 15% during the last recession don’t seem to be gaining any momen

Anna Fedec,
10/30/2009 2:49:14 PM