The latest European Union economic forecasts for the EU as a whole and the Euro area in particular do not make good reading.
They reckon unemployment will be above 12% in Italy, above 11% in France, above 25% in Spain and above 17% in Portugal for the three years 2013-15. The average rate in Euroland will be around 12%. Only Germany, amongst the majors, has a more respectable rate of a bit over 5%.
Outside the Euro the UK, Denmark and Sweden are forecast to have unemployment below 8% for the same time period. The non Euro countries as a whole reduce the overall rate of European unemployment compared with the bad results in the Eurozone.
They forecast an overall fall in output and incomes of 0.4% this year for the Euro area, to be followed by growth of 1.1% in 2014 (0.7%). Germany is forecast to grow 0.5% and 1.7% (2.2%), France 0.2% and 0.9% (1.1%), Italy to fall 1.8% to be followed by growth of 0.7% ( – 1.1%), with Spain falling by 1.3% followed by growth of 0.5% (-0.8%).
In contrast they expect better results from the non Euro countries. The UK is expected to grow by 1.3% and 2.2% (3.5%), Sweden by 1.1% and 2.8% (3.9%) and Denmark by 0.3% and 1.7%.(2%)
So why do they think it is so much worse in the Euro than outside? They accept that banking problems allied to balance of payments imbalances between the member states have led to poor performance. They think banking problems may continue for longer. They say “Frictions related to the reallocation of resources in the process of internal adjustment is still expected to weight on growth….” They also admit that “Bank balance sheet repair is a pre-c0ndition for the normalisation of credit growth” and “decreasing bank lending volumes appear to be largely explained by low credit demand, but supply is a binding constraint in some member states…”
All this leaden prose and jargon is saying two crucial things about their currency zone. Firtly, they did not create a well regulated commercial banking union, and are now paying the price for overextended banks and credit in too many parts of their zone. Secondly, they did not get the economies into line, so some states built up large trade deficits which they can no longer finance or afford. The result of both these errors is a recession machine. They have to cut bank credit to get balance sheets into shape. They have to slash demand to cut imports to cut trade gaps.
Meanwhile Sweden, Denmark and the UK, the three higher income countries out of the Euro, can follow policies that work better for them. They have 3 years of superior growth to look forward to as a result, according to the EU itself.