It's been quite a year, but leading economists warn that next year
could be worse. The euro crisis is still unresolved, plus the economic
outlook has darkened.
Nineteen months since the first bailout of Greece, the euro zone
seems to lurch from one mini-crisis to another. Economists on a panel I
hosted on Bloomberg Television all agree that not enough has been done
to fix the euro, even after the EU's so-called Euro-plus pact spelt out
steps to create a fiscal union to complement the shared currency, and
recapitalise the region's banks.
For a start, the EU'S new fiscal rules are pro-cyclical, which means
that they could worsen a downturn (and one is coming in 2012), according
to UBS's Chief Economist Larry Hatheway. Gerard Lyons, chief economist
of Standard Chartered Bank, says confidence in the euro zone has been
"shot to pieces" and what's really needed is a growth strategy that also
deals with intra-EU imbalances. Meanwhile, John Llewellyn, founder of
Llewellyn Consulting and adviser to the U.K. Treasury, says the euro
area needs to look to the U.S. as an example of a monetary union that
holds together in part because of its political union.
So, the structure of the euro still needs work. In the terminology of
economics, the euro zone must become a so-called optimal currency area.
There are two criteria for being in an OCA: trade integration and
convergence of incomes.
All 17 euro members trade largely with each other, so the first point
is met. The second is tougher. For a country to grow sustainably in a
monetary union it must be competitive, and this has to be based on lower
costs and higher productivity rather than exchange-rate devaluation. If
a country can't compete with Germany then it's not viable to share a
currency. If a country isn't suited to be in the same currency as
Germany no amount of fiscal discipline will work. At the same time,
which countries should remain part of the euro is unlikely to be sorted
within the next year, in part because the euro zone may not be in a
position to cope with the consequences of a country leaving. As European
Commission President Jose Barroso said today: the EU isn't yet fully
equipped to defend the euro.
So, the euro crisis will weigh heavily on 2012. Standard Chartered's
Lyons, the most accurate economic forecaster in the world, according to a
Bloomberg assessment, sees the global economy growing at 2.2 percent.
But it's a tale of two worlds: the fragile West, resilient East. In the
first half of 2012, Europe faces deep recession, Standard Chartered
says. And the U.S. will grow at just 2 percent next year, which is
considerably below its normal trend growth rate. Even though emerging
economies won't be entirely isolated from Western woes, Lyons expects
they will manage to grow as they're better diversified than three years
ago, including toward consumers and domestic demand.
UBS's Hatheway says it's "unavoidable" that the euro-zone economy
will shrink 1 percent while the U.S. could gain a bit of momentum. But,
he sees emerging economies slowing and estimates that they have less
scope for stimulating their economies now compared with the last global
financial crisis.
For Britain, the economy could already be contracting, according to
Llewellyn. That echoes the forecast of the OECD that Britain is in a
"mild recession" and is consistent with the flat output expected by the
Bank of England until at least the middle of 2012.
