31/03/2005
EUROFRAME - EFN Spring 2005 Report 'Economic Assessment of the Euro Area: Forecasts and Policy Analysis'
EUROFRAME - EFN members are: CPB (The Hague), DIW (Berlin), ESRI (Dublin), ETLA (Helsinki), IfW (Kiel), NIESR (London), OFCE (Paris), PROMETEIA (Bologna), WIFO (Vienna) with CASE (Warsaw).
PRESS RELEASE
EMBARGO: 11:30 a.m. (12.30 p.m. CET), Thursday 31 March 2005
Launch of the inaugural EUROFRAME - EFN* Spring 2005 Report
'Economic Assessment of the Euro Area: Forecasts and Policy Analysis'
At 11:30 a.m. (12:30 p.m. CET) on Thursday 31 March at the
National Institute of Economic and Social Research, 2 Dean Trench Street, Smith Square, London SW1P 3HE, United Kingdom
The report** and can be found on the EUROFRAME web site www.euroframe.org.
'Ten of the most respected economic research institutes in Europe, have produced a combined forecast which shows that Euro Area economic growth will experience a modest rate of expansion of 1.5% in 2005 and 2% in 2006. This faltering recovery will move the Euro Area back towards rates more in line with its estimated potential after almost a half-decade of underachievement. The performance of the Euro Area is predicted to lag US economic growth over the next two years. The ambition of the refocused Lisbon Agenda, to make the European Union the most dynamic and competitive economy in the world therefore remains a formidable challenge, though a clearer emphasis upon economic growth is an important restarting point.'
“The most potent threat to Euro Area growth prospects stem from the risk of a further appreciation of the euro and with how global macroeconomic imbalances are played out over the coming few years. It is not clear-cut that the dollar/euro exchange rate has much further to fall. The correction of global imbalances has to occur mainly through higher US private savings required to restore balance to its triple deficits – trade, government and households. The full impact would depend upon the nature of the shock and the response of the monetary authorities. For example, if a 10 per cent US housing and equity price decline triggered the balancing, the Euro Area output would be around one-third of a per cent below the baseline in the first year and would only recover slowly thereafter. The exchange rate changes implied are rather modest.”
“Oil price most likely not a threat to the Euro Area recovery despite the shock resulting from increased demand in developing countries and especially in China impacts negatively on the Europe’s output and inflation. Oil prices permanently at US$5 above the baseline would decrease Euro Area output growth by only 0.1 percentage points in the first two years. The recycling of the oil revenue through increased imports by oil producers such that high world economic growth means that high oil prices are not a major threat to recovery.”
“Explanations for the weak growth performance of the Euro Area must also focus upon domestic demand deficiencies. The appreciation of the euro can definitely not explain poor domestic demand. Monetary policy has not been restrictive, and interest rates in real inflation-adjusted terms are low, yet consumption growth remains weak with some modest investment recovery underway. The influence of discretionary fiscal policy has been close to neutral at the aggregate level in 2004 but still has made only a limited contribution to domestic demand in recent years.”
“Two views are expressed within EUROFRAME-EFN institutes on the Council’s agreement reached on 22 March 2005 on the implementation of the Stability and Growth Pact. Some of us are worried that the agreement will be detrimental to budgetary discipline and will lead to higher government deficits and insufficient budgetary consolidation. Some of us regret that criteria such as the 3% of GDP threshold remain: they would like the policy framework to prevent negative externalities to occur (excessive inflation, current account deficits) and domestic fiscal autonomy to be reaffirmed.”
“Interest rates are expected to rise by 0.75 percentage points over the next two years, while fiscal policy is expected to be broadly neutral. Price inflation is forecast at a rate of 2 per cent in 2005 and 1.8 per cent in 2006. The three largest economies of the Euro Area are expected to exceed the 3 per cent deficit of the Stability and Growth Pact, with the overall Euro Area public deficits averaging around 2.5 per cent both this year and next.
“The host of deficiencies across the Euro Area economies point to the need to address specific policy measures at solving seemingly intractable problems such as the high rates of unemployment. Forecasts for unemployment rates in the Euro Area are 9 per cent this year and 8.8 per cent next.”
The Spring 2005 Report also contains a Special Policy Topic:
“When Jobs Disappear and Workers Do Not: International Relocation of Production and the European Economy”
“Visible disadvantages and much less visible gains characterize the impact of international relocation of production on the EU economy. Most of EU countries’ trade and capital flows take place with the US or other European countries. Hence, job losses due to relocation are relatively small. Also, relocation only to a limited extent weakens the position of low-skilled workers, which manifests itself in unemployment or growing wage differentials with high-skilled workers. Technological change is more important for the disparity between low-skilled and high-skilled workers. Moreover, a part of relocation is not motivated by low-cost competition, but by access to foreign markets or foreign suppliers.”
“Gains from relocation countervail the disadvantages. Larger international trade and capital flows reduce import prices, create opportunities for productive companies, expand product variety and foster international learning. Relocation also enables companies to increase their productivity. More productive companies reduce their prices or pay higher wages, thus benefiting customers and workers. These advantages spread out across the economy and are less visible than direct disadvantages.”
“Policy makers can facilitate sectoral shifts and skill upgrading to enhance Europe’s comparative advantage in high-skilled activities. R&D warrants special attention because relocation of R&D entails the risk of a loss of associated knowledge spillovers. To prevent tax competition, policy coordination on corporate taxes seems desirable. Last and somewhat least from the perspective of relocation, but certainly not least from the perspective of technological change: in their design of social security provisions policy makers face an awkward dilemma between greater income inequality and higher unemployment of low-skilled workers.”
For further details visit the EUROFRAME-EFN web site or contact:
Danny McCoy, at danny.mccoy@esri.ie or (00 353-1) 6307143 (office) or 00 353 876349602 (mobile);
Eleanor Bannerton at press@esri.ie or (00 353-1) 6671525.
LINE GOES HERE
*EUROFRAME - EFN members are: CPB (The Hague), DIW (Berlin), ESRI (Dublin), ETLA (Helsinki), IfW (Kiel), NIESR (London), OFCE (Paris), PROMETEIA (Bologna), WIFO (Vienna) with CASE (Warsaw).
**EUROFRAME has taken over the European Commission sponsored project European Forecasting Network (EFN). The previous team still operates under the EFN name so our report is called the EUROFRAME-EFN report and can be found on the EUROFRAME homepage www.euroframe.org/efn
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