The EEAG Report on the European Economy 2011. Governing Europe

The European Economic Advisory Group at CESifo (EEAG) released its tenth Report on the European Economy on the 22 February 2011.

The pan-European group of scholars expects world GDP to increase by 3.7% in 2011, falling back to what can be considered its long-term average. Once again, Asia is expected to deliver the strongest contribution, while North America and Europe will remain below their potential. The growth in world trade, in turn, will fall from 12% in 2010 to around 6% in 2011.

The United States’ continuing structural problems will preclude a strong, self-sustaining upturn there. By contrast, Europe’s capital-exporting countries (Austria, Denmark, Finland, Germany, the Netherlands and Sweden) will show above-average growth, since their capital is now increasingly reluctant to leave the home country. Unemployment in these countries is likely to fall during the year. In Europe’s capital-importing countries, however, the recovery will remain subdued, mainly as a consequence of restrictive fiscal policies and the capital markets’ reluctance to provide further cheap finance. Italy, Spain and Ireland will recover only slowly, while Greece and Portugal will remain in recession.

The authors also present a detailed blueprint for European economic governance that includes a layered approach to solving sovereign liquidity or solvency problems. They propose a three-step procedure designed specifically to blend solidarity with market discipline. It starts off with liquidity support as a first line of defence, followed by a plan to help in the case of impending insolvency, and concludes with a full-insolvency procedure for the worst case. This system would make the European Central Bank bailout policy superfluous and could in the near future be applied to Greece, whose precarious situation is analysed in depth in a special chapter. The Report also contains an extensive analysis of Spain, outlining the available policy options. A final chapter discusses specific options for regulating and taxing the banking sector.

Spiegel Online International, 22.2.11: Economists Warn Greece May Have to Quit Euro http://www.spiegel.de/international/europe/0,1518,746957,00.html

European Economic Advisory Group at CESifo: EEAG Report on the European Economy (link to the latest edition) http://www.cesifo-group.org/eeag

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