Euro Area Economic Growth May be Slower in 2010

In the third quarter of 2009, the Euro Area economy emerged from the worst recession since World War II. And although estimates for next year are positive, the second largest economy in the world will have to face many challenges in order to make a sustainable recovery.

Indeed, fiscal stimulus fuelling the recovery in the second half of 2009 will dry up sooner or later. And it is likely that economies spending the most and stimulating the zone growth in recent months will also be the ones suffering the most. In fact, falling confidence and lower capital investments may depress further labor market. Moreover, the unemployment rate already reached 9.8% in September, the highest since introduction of the euro. This in turn could make people spend less and slow down production. 

To make things even worst, financial institutions still prefer to accumulate reserves for worst times and many will continue to be reluctant to lend as current rates don’t assure adequate profit. Furthermore, expansionary fiscal policies during the 2008/09 recession have increased national debt to very dangerous levels. For example, Greek national debt is projected to rise to 135.4% of GDP in 2011 and Italy’s debt reached 105.8% of nation's output in 2008. And even in Germany, outstanding liabilities are expected to increase to 77% of GDP next year, from 60 percent in 2002. And there is no doubt that in order to repair their finances countries will need to cut spending and increase taxes in the next few years.

Anna Fedec,
12/10/2009 6:01:52 PM