© Yusaf Akbar
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Since the basic model of macroeconomic policy in the Eurozone is deflationary, sluggish growth in the Euro bloc continues. As a number of the Euro area member states are also indebted, policy emphasis remains on austerity further weakening growth potential. While the European countries such as Slovakia, Estonia and Slovenia may have slightly higher growth, their dependence on exports and service trade to the core Eurozone states will also restrain their expansion. Inflationary pressures are rather weak and should remain so in the short to medium term.
Do you believe that the measures undertaken by the ECB, the IMF and policymakers to counter the region's debt crisis are effective? What other stimulus should be considered to combat the crisis?
The ECB is constrained by its treaty obligation to maintain price stability. As a young institution seeking to gain credibility for low Inflation, it is unlikely that it will aggressively pursue monetary easing. This is an error. Austerity, rather than reducing long-term debt, worsens short term growth potential raising unemployment, creating political instability and endangering long-term debt reduction in a societally sustainable fashion. However, disagreements among the core Eurozone member states means that no consensus on reflation for the Eurozone is likely to emerge in addition to fears that multilateral debt forgiveness/restructuring will create a dangerous precedent for the future. Eurozone member states should agree to multilateral coordination reflation and stimulation measures to kick-start growth. As a final thought, I would not necessarily characterize this situation as a 'Crisis', rather a necessary process of adjustment for the Eurozone, given the fact that some countries entered the Eurozone not having met all the convergence criteria.
What is your forecast for the Eurozone economy for the short and long term?
In the long-term the Eurozone will rebound, as the economic fundamentals remain strong. However, a focus on competitiveness is key for the member states, who are lagging behind German benchmark. In the short term, the political cost of failure means that Eurozone will continue to finance the debts of Greece, whilst extracting concessions from the Greek government. In Italy and Spain, it appears that there is a political consensus on austerity, but the effects of these measures have not yet been fully felt among voters yet. We will know better a year from now.