Europe 2015: Growth-unfriendly compromise

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The limits of the Euro area’s uneasy compromise GDP growth will lack momentum at 1.3% in 2016, up from 1.2% in 2015, Bank of America Merrill Lynch Global Research team pointed out during a briefing on the outlook for Europe in 2015.

Looking at 2015 major challenges, the panel said they expect CPI inflation to average 0.5% in 2015 and 1.1% in 2016.

“We do not think that the current political compromise is enough to bring back the eurozone on a sounder footing, which we would define as the capacity to sustain the accumulated levels of debt without monetary policy crutches. We don’t expect these two conditions to be met over the forecasting horizon,” said Gilles Moec (pictured), head of Developed Europe Economics.

According to Moec, the ECB needs to take a stronger stance to prevent a deflationary scenario from unfolding. “We need to bring back domestic demand and we need structural reforms. We have a very fragile compromise with a fiscal stance that is neutral and not supporting growth we need domestic demand to rise Monetary policy has touched its limits, within its traditional ways of giving liquidity to boost borrowing but. It working, it needs to be more imaginative.”

Discussing the possibility of QE working for the European economy, Alexander Batchvarov, MD, said he fears QE in Europe will not benefit from the same distribution channels as in the US and might not deliver the same results.

In terms of the types of reforms needed to boost growth in the eurozone, the panel pointed to a thorough reform of the labour market as the start point. “The labour markets in Europe need to mitigate their rigidity; instead still dualism in many European countries. There is a Rubicon to be crossed here and time is definitely crucial, as if deflation actually kicks in, it might be no longer possible to act on the labour market,” Moec concluded.

 

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