Gloomier outlook for Europe

Policy Study

Outlook and scenarios for the European economy

This new FEPS-ECLM paper highlights growth forecasts from the main international organisations, and the way in which the European economy could develop in the coming years following various scenarios. Indeed, a further escalation of the crisis, for example due to insufficient or late political responses, could have major consequences. In addition, most European countries have tightened fiscal policy over the last couple of years and are expected to continue doing so in the coming years. However, investment ratios are low and private savings surpluses are high in Europe, which indicates that there is great potential for creating confidence in the European economy and in this way increase consumption and investment, which would favour an increase in growth and employment.

Summary
The global outlook began to brighten in early 2012, but lately the situation has again deteriorated, and in the latest forecast from the OECD the GDP growth is expected to be close to zero this year. As a consequence of the crisis more than 22 percent of the young Europeans are today unemployed. Most European countries have tightened fiscal policy the last couple of years and are expected continuing doing so in the coming years. But investment ratios are low and private savings surpluses are high in Europe, which indicates that there is a great potential in creating confidence in the European economy and in this way increase consumption and investment. The greatest risk to the European outlook is still related to the situation in the debt-ridden European countries – especially in Southern Europe. A further escalation of the crisis, for example due to insufficient or late political responses, could have major consequences. On the other hand, it is also possible that Europe manages to get out of the crisis faster than at first thought. But getting Europe out of the crisis will require further policy actions, both at the European level as well as on the national level. If this happens it can create close to 2 mio. jobs in Europe.

Table of content:

• Outlook for the European economy in the coming years
• Youth unemployment in Europe on a historical high level
• Fiscal policy during the crisis
• Large growth potential if consumption and investment are increased in Europe
• Scenarios for the European economy
• Negative scenario: Worse outlook for Spain and Italy
• Positive scenario: Further policy action