Eurozone's Autumn

Autumn
You heard him coming /  in the wind of August
 in the rains of September / breaking and weeping…

These words of the Italian poet Vincenzo Cardarell, are a good description of the autumn forecasts by the European Commission.

Right at the beginning of the editorial of the document, signed by Marco Buti, Director of General
 Economic and Financial Affairs, we read that “after just a year of moderate growth, the momentum of the EU economy began to slow in spring 2014. In the second half of this year, GDP growth in the EU is set to be very modest, while in the euro area it will almost stagnate”.

It's worthwhile to look at forecasts on GDP growth made by the Commission in the spring and compare them with the recent ones, measuring the percentage difference for the four largest euro area countries and three countries out of the euro.                                   

Growth rates of GDP and percentage gaps

                            Forecast  spring  - autumn 2014      var.%           Forecast spring -  autumn 2015      var. %

As you can see the revised estimates are particularly strong for Italy and France, but sensitive (in 2015) also for Germany. In the case of Italy, there is even a change of sign from plus to minus. For the three EU countries outside the euro, changes are much more smaller (in the case of the UK altogether null).

Along with the slowdown in growth, we see also falling inflation expectations; note that even in spring forecast inflation was estimated to be well below 2%. The greatest gaps, not coincidentally, are those of France and Italy:
 

                                                Inflation rates and percentage gaps

                            Forecast  spring  -  autumn 2014      var.%          Forecast spring  -   autumn 2015      var. %

This happens not by chance, but because in the Commission model inflation is related to the estimates of the potential output; the lower the potential for economic growth, the greater the inflationary pressure. Economists of the Commission are very good, like Ptolemy was, but unfortunately it seems that he was wrong, when placed the Earth at the centre of the universe.

The Commission considers that the economic slowdown is mainly due to structural reasons, and only marginally to falling demand. If the difference between the nominal and the actual deficit is small, it follows that Italy and France must step up austerity policies. At the centre of the universe of the euro is a balanced budget. The Church loved Ptolemy’s ideas, and Berlin likes those of the economists of the Commission. We could try to do as Copernicus, and say that the main component of European stagnation is the lack of demand. Then the sharp decline in inflation is the logical consequence, and economic policies should be directed toward expansive fiscal policy, with public investments and incentives to private investments.

Towards the end of the editorial, Buti mentions the idea of  "fiscal space, where it exists, can and should be used to support demand, in particular by stimulating investment". Between the lines, one senses that Jean- Claude Juncker, the new President of the Commission, would like that Germany would decide more investments. He also said it would speed up the launch of the famous 300 billions of investments.

Up to now we are wrapped in a thick fog. It is not known if Juncker’s 300 billions are additional public investments or public-private investments already provided in the budget of the Commission or forecasted by it. It is not clear who would manages investment plans and how they would be financed. The famous quantitative easing of the ECB could find a great place to start right financing of 300 billion. But a Copernican revolution in Germany is much less likely than it is the end of the euro.

P.S. Last OECD 2015 forecast is the same as EC for Germany and Spain, slightly better for France (0,9 instead of 0,7) and definitely bad for Italy (0,2 instead of 0,6).