1 The Current Economic Situation in the Euro Area Presentation by Amy Medearis and Valerie Rouxel-Laxton, Delegation of the European Union Webinar March 7th, 2012

The euro area economy started to recover in 2010, but growth turned negative toward the end of last year. The debt crisis started in a few small “peripheral” countries but has affected growth in the euro area as a whole. The economic crisis has become a political crisis, too. But recent actions by European leaders are helping to mitigate the crisis and lay the foundations for growth. The big picture

Part 1 of the 3-part Euro Challenge question Describe the current economic situation in the euro area (not EU) “Current” means the latest available data and what experts expect the situation will be in the near future. Discussing the economic situation using these major economic indicators: 1. GDP growth 2. Inflation 3. Unemployment

Moderate recession forecast for 2012 Real GDP growth, Year to year percentage change (Forecasts in shaded areas) Source: Eurostat (current data), European Commission (forecasts) United States Euro Area (17 countries) Mildly negative growth (recession) forecast for 2012 (-0.3%) GDP is expected to recover in the course of this year as the crisis gradually abates Recession will be deeper in countries most affected by the debt crisis; recovery will occur sooner in countries less directly affected.

Unemployment on the rise again 5 The unemployment rate in the euro area is rising again as growth slows; it hit a euro-era high of 10.7% in January. There are huge differences in unemployment rates across euro area countries (just 4% in Austria but over 23% in Spain). Youth unemployment is a growing challenge in some countries. Unemployment Rate, Year to year (Forecasts in shaded areas) Source: Eurostat (current data), European Commission (forecasts) United States Euro Area (17 countries)

Inflation: elevated but expected to come down 6 Euro area inflation is still relatively high due to past increases in oil and commodity prices globally. Inflation is expected to gradually come down due to slower growth. However, it will remain above the ECB’s target of “close to but below 2%” for some time, so the ECB will continue to monitor inflation. Inflation rate, Year to year percentage change (Forecasts in shaded areas) Source: Eurostat (current data), European Commission (forecasts) United States Euro Area (17 countries)

ECB action is helping… The ECB has lowered its benchmark interest rate to a historically low 1.0% Indirect purchases of government bonds (esp. Italy, Spain) have helped reduce those interest rates ECB lending to banks (“LTROs”) has provided much- needed funding to banks and sharply decreased the risk of a big bank going under. Mario Draghi, ECB President

… but fiscal policy is weighing on growth “Fiscal consolidation” is when the government cuts spending and/or increases taxes in order to control deficits and debt. Most euro area governments do need to control deficits and debt, but spending cuts and tax increases have negative effects on growth in the short run. Some countries can tighten their belts more slowly while some must do it faster to regain investor confidence.

Europe’s 5-point strategy to end the crisis 1. Programs for Greece and other troubled countries 2. “Firewall” fund to stop contagion 3. Restore confidence in the banking sector 4. Improved fiscal rules 5. Promote sustainable growth

Do you think the euro will survive? A single monetary policy for 17 countries is hard to manage. Public debt levels in some countries are unsustainable and the belt-tightening measures are weighing on growth and creating social tension. BUT There is a strong political commitment of Europe’s leaders to defend the euro, and the 5-point strategy is addressing the problems. The euro has brought important benefits for countries. Leaving the euro would involve huge costs and make it harder for countries to get their economies in shape for the future.

Additional things to know What does a country gain from being a member of the European Union (27) versus being a member of the euro area (17)? The costs and benefits of adopting a single currency What is the mandate of the European Central Bank?

Learning Resources and Support Find us on Facebook! facebook.com/eurochallengecompetition Follow us on Twitter! twitter.com/eurochallenge Find interesting articles on Delicious! delicious.com/eurochallenge Watch helpful videos on Vimeo! vimeo.com/channels/eurochallenge Ask away on the Euro Challenge Forum! euro-challenge.org/forum Read William’s (our intern’s) Newsflashes!

Enjoy your Euro Challenge experience!