14 February 2013

The Shrinking eurozone

The euro debt crisis is deepening. The eurozone, already in recession, shrank further in the last quarter of 2012. The GDP of the contracted by a higher-than-expected 0.6% in Q4, the biggest fall in output since the start of 2009. 

A recession is usually defined as two consecutive quarters of contraction. In Q1 of 2012, the eurozone economy failed to grow, while in Q2 it contracted by 0.2% and in Q3 by 0.1%. These numbers reveal one startling fact: for the first time since the eurozone erupted, the eurozone failed to grow in any quarter during a financial year.

The major reason behind the fall in output is the austerity drive undertaken by almost all eurozone members, including Greece, Germany, and France. These measures include reduced spending (both private and public), slashed public sector salaries and pensions, and lowered spending on welfare measures (like healthcare).

In an interview with the BBC, Peter Praet, the President of the European Central Bank, is cautiously optimistic about the growth prospects in the eurozone. 
"Some fundamental issues in the labour market, corporate governance are being addressed in a very impressive way," he says. But these reforms do raise some questions about who bears the burden. Addressing these is the skill of politics and that, he says with a laugh and, I suspect some relief, "is not my business". 
The eurozone is dealing with more than these long standing structural issues. There is also the financial debris left by the bursting of a bubble. It was a bubble that enabled governments to borrow cheaply - even Greece was paying interest rates almost as low as Germany.
It also showed up in property markets, especially in Spain and Ireland. So it raises a question for the ECB. Should it have done more to prevent the boom that led to the bust?

Read the complete interview.

Read The Explainer: The eurozone Debt Crisis

1 comment:

Priyangshu Mahanta said...

Sir, I believe there was a typographical error about the president of ECB. Is it Mario Draghi... My sincere apologies if I am mistaken