Μust read->The recovery in the Euro area remains weak, and inflation remains too low. Our forecasts for the Euro area remain roughly unchanged, 1.1 percent for 2014, and 1.5 percent for 2015. These numbers hide, however, differences across countries. In the core, we have revised our forecasts up for Germany, and down for France. In the periphery, we have revised our forecasts up for Spain, down for Italy. To strengthen the recovery, the Euro area clearly still needs strong action on both the demand and the supply side: In most Euro countries, unemployment rates far exceed their equilibrium value, and Euro wide inflation is too low. Thus, demand side policies are still of the essence. As fiscal space is tight, monetary policy must continue to support activity. The recent measures taken by the ECB are welcome. It is too early to assess their effects, and if inflation continued to remain stubbornly low, more measures should be considered. Monetary policy cannot do the job alone however. The asset quality review currently under way in European banks is critical to reestablishing confidence in banks, and improving intermediation. And looking beyond the demand constraints, structural measures must be taken to increase very low potential growth rates. These measures differ across countries, ranging from reforms to re-enfranchise the unemployed youth, to measures that increase competition in non-tradable sectors, to infrastructure spending.
Posted on: Fri, 25 Jul 2014 15:10:11 +0000
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