Cause and Effect in European Politics and Law

‘Ice Age’ in the European Economy in 2012

Ralitsa Kovacheva, February 27, 2012

In 2012 the European economy will remain at freezing point, while in the second half of the year modest growth is predicted. The eurozone GDP, however, will shrink by 0.3%. These data from the interim economic forecast by the European Commission are more pessimistic than the data in the autumn forecast, as deterioration is even more evident when you examine the data for individual countries.

While the autumn forecast predicted economic contraction only in Greece and Portugal, now this is true for Belgium, Spain, Italy, Cyprus, Netherlands, Slovenia and Hungary. The largest downward revision (by one percent or more) is made for Estonia, Spain, Greece, Italy and the Netherlands. A total of nine countries will mark negative economic growth against zero growth in one country and positive in seventeen. The highest growth is expected in Latvia - 2.1% (5.3% in 2011), Lithuania - 2.5% (5.8% in 2011) and Poland - 2.5% (4.3% in 2011). The worst forecasts are that for Greece (-4.4%) and Portugal (-3.3%).

A more severe year for the "rescued" countries

Greece has just received a second bailout, but the Commission`s forecast suggests a third, because the outlook for the Greek economy is bad and the loan is only by 2014. This year Greece's GDP will shrink by 4.4% and unemployment will continue to increase. The government’s decision to reduce the minimum wages (by around 22%) is expected to bring down the unit labour costs by around 15% and thus increase the competitiveness of the economy and employment among young and low skilled people. But on the other hand, it will hit the already low domestic consumption, the forecast states.

And while we can say Greece is the engine of uncertainty in the euro area, this uncertainty is a determinant factor for the poor forecasts of other countries under rescue programs. The Portuguese economy will shrink by 3.3 percent in 2012 after having declined by 1.5 percent last year. On one hand, domestic consumption has shrunk because of the austerity measures and on other - exports have suffered from the general difficult situation in the euro area.

Last year the Irish economy grew by 0.9 percent after shrinking by 10% between 2008 and 2010, which can be defined as a feat. In 2012 however, growth will be only 0.5%. The main problem facing Ireland is that exports, on which the economy entirely relies, are limited by the overall poor outlook for the euro area. Domestic consumption will continue to decline due to budget constraints and rising unemployment.

Spain and Italy

are the countries from which the biggest problems for the euro area could rise. Although both countries have made great efforts to put under control their finances and drive their economies, the outlook does not give cause for optimism. Both countries are highly vulnerable to the overall poor forecast for the euro area and the uncertainty associated with the debt crisis.

The situation in Spain is deteriorating, given the expectations the economy to shrink by about -1% in 2012. High private indebtedness, credit crunch and record unemployment continue to set the negative tendencies in the Spanish economy. The Commission`s forecast notes that the picture may change after the additional consolidation measures in Budget 2012 become clear. (Its adoption was delayed until late March because of parliamentary elections in November 2011). The Financial Times wrote, however, that because of the deteriorating economic forecast the Spanish government has urged the Commission to reduce the deficit target of 4.4% as it believed a budget deficit of over 5% was a more realistic goal. At this stage there is no reaction from the European Commission.

The Italian economy will shrink by -1.3% this year. This is the third worst forecast after those of Greece (-4.4%) and Portugal (-3.3). According to the Commission economic activity will stabilise in the second half of the year, provided there is no deterioration on the financial markets and the spread between Italian and German 10-year bonds remains stable at around 370 basis points. In other words, if the borrowing costs of Italy do not continue to increase. We are still expecting to see the result from measures taken by Mario Monti's government, which has already delivered their first effect – confidence in the country is back again.

Outside the eurozone

there is only one country with negative growth - Hungary. Recently, the country has drown attention with bad news only – the European Commission has started three infringement procedures against the country for violating independence of the central bank and the judiciary, the European Parliament has questioned the respect for democratic values in Hungary, and on top of that the country is threatened by suspension of half a billion euros from the EU Cohesion Fund for its excessive budget deficit. The Hungarian economy will mark a symbolic growth of 0.1% in 2012. It is too dependent on exports, which generate 87% of Hungary’s GDP but its prospects are bleak because of the general hard situation of the euro area. The collapse of the national air carrier Malév would additionally dampen exports of services and raise imports. The good news is that the new Mercedes factory in Hungary is ready to start production in the first half of the year.


is a true white swallow amidst the overall gloomy picture. Not only because its economy will continue to grow, albeit more slowly (by 4.3% in 2011 and by 2.5% in 2012), but because this growth is broad-based, having all prerequisites to go on- resilient consumer spending, better access to credit, increased profitability in the corporate and as a result - an increase in private investment. Increased public spending on infrastructure co-financed by the EU have also contributed to growth. The successful absorption of EU funds can definitely be called a Polish trademark. Of course, the country is highly motivated by the upcoming European Football Championship in June 2012 - on this occasion the main roads have already been completed. Poland also relies heavily on exports, and its enterprises can benefit from a depreciated currency and the favourable sectoral structure of exports.

The British economy

will also benefit from a big sporting event - the summer Olympics in July and August 2012. The economic growth will be only 0.6%, but the fact that there is no deterioration compared to the autumn forecast can be regarded as good news. Although the figure does not look striking amidst the data for other countries, the unemployment rate of 8.4% is the highest in the UK since 1995. The forecast provides for an increase of investment in the second half of 2012, albeit from a low base. Attracting investment and ensuring growth and employment is the top priority of the British government, along with budgetary consolidation and modernisation of public services, and Prime Minister David Cameron arrives at each meeting of the European leaders with the words "growth, jobs and investment." The greatest risk for the British economy stems from slower growth in its main export markets, especially the euro area and the potential negative effects on confidence from the debt crisis.

The Bulgarian economy will grow by 1.4% as domestic demand is expected to become a major driver of growth, which in the past two years has been driven by exports. Investment will mainly rely on the public sector, as private investment is low because of the relatively high indebtedness of the private sector. "After a notably slow start in EU structural funds intake over the previous years, it is planned to increase absorption significantly in 2012." The European Commission delicately recommends Bulgarians to reduce their big savings at the expense of increased consumption as "uncertainty regarding the consumption behaviour of households remains one of the major risks to the outlook."