Is Euro Area Economy Collapsing?

Not a long time ago, the Euro Area economy was considered as one of the strongest in the world. However, it is now visible that the region's economy is deteriorating day by day and the worst part of the economic cycle has not yet been reached.

Indeed, it's hard to estimate how much bigger the crisis may be, looking at the influence of credit tightening on consumer spending, business investment and exports. For example, third quarter GDP is expected to deteriorate even further after shrinking at an annualized rate of 0.7% in the second quarter. Furthermore, purchasing managers' index, a business survey, has plunged significantly in October, showing clearly that the manufacturing and service industries activity is deteriorating by a pace not seen on its history.  Also, sentiment among consumers slumped to a 15-year low in October and retail sales retreated by 1.6% in September.

Looking at the speed and the range of economic downturn the question arises "if everything was done by European policy makers to avoid such a downturn?"  In fact, the European Central Bank has cut twice its benchmark interest rate. However, looking at the timing and range of the cuts it is believed that they were reduced too late and not enough to stop the slide, especially when inflation has been dropping from its peak. Finally, the European Commission's proposal of accelerating structural reforms and of introducing low-carbon technologies in order to limit damage by the global financial crisis seems a little bit powerless. 


Anna Fedec,
11/12/2008 4:16:45 PM