Reforms key to EU growth

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Reforms key to EU growth

The contours of recession and recovery inside the EU will be drawn with forecasts this week and a quarterly snapshot next week, setting the landscape for an informal summit on growth likely by the end of May.

By (AFP)

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Published: Mon 7 May 2012, 11:04 PM

Last updated: Tue 7 Apr 2015, 12:25 PM

The new data, together with leading indicators from eurozone businesses, will keep financial markets on edge, the European Central Bank on watch and political controversy about austerity versus growth on the boil.

The austerity-growth dilemma has come to a head, pitching so-called supply-side economics, based on sound budgets and a drive for efficiency, against calls for extra stimulus to counter the drag of cutbacks. “Austerity is a powerful medicine,” said Berenberg Bank economist Holger Schmieding.

“If applied intelligently, it lays the basis for more competitiveness and higher growth in the future. But too much of a good medicine can weaken the patient,” he noted.

European Union officials issue spring forecasts this week, and first-quarter growth data possibly showing recession the following week. Leading indicators on Friday signalled that eurozone private sector activity continues to contract, just as protests against budgetary reforms and appeals for stimulus increase in countries undergoing radical structural reforms to fight debt.

The “stimulus measures implemented by the European Central Bank have not had a lasting impact on the real economy,” said Chris Williamson, chief economist at Markit research firm which published the indicators. While ensuring that low inflation is the ECB’s sole policy objective, its chief Mario Draghi called on Thursday for putting “growth back at the centre of the agenda.”

However analysts believe the ECB may reevaluate its stance after the latest batch of data. Draghi also detailed his views on a “growth compact”, which has become the focus of discussion following the signing in March of the EU’s new fiscal compact requiring greater budget rigour.

He warned that a slowdown in painful budget cuts would “not be very much help” in restoring growth. Some economists agree that a Keynesian-style state-driven stimulus fuelled by taking on further debt won’t work this time around.

“Even if a consensus is formed within European policy circles to relax the fiscal stance, we think that there is no substantial workable trade-off between a significantly slower pace of fiscal retrenchment and better macroeconomic conditions,” said Gilles Moec, a senior economist at Deutsche Bank.

Christian Schulz, also a senior economist at Germany’s Berenberg Bank, said the latest data “confirms the need to focus on pro-growth structural reforms to offset the harsh impact of austerity.”

However “none of these structural reforms is likely to significantly mitigate the short-term impact on growth of the fiscal consolidation,” noted Moec, nor would increased EU investment likely be sufficient to soften the blow. —

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