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GDP growth in the euro area is expected to come in at -0.3 pe rcent in 2012 and 0.9 per cent in 2013. The pace of fiscal adjustment is particularly fast in the hard-hit periphery countries, and this is weighing on the growth outlook. Projected consolidation for 2012-13 ranges from more than 4 percentage points of GDP in Cyprus, Portugal, Greece and Spain, to 0.5 percentage points or less in Germany, Austria, Finland and Luxembourg. The rate of unemployment is expected to continue to vary widely across the region—from 5 per cent in Germany to about 24 per cent in Spain this year.
“The immediate priority for the eurozone is to establish a banking union and move toward more fiscal integration. These moves would help stem the decline in confidence engulfing the region, lower borrowing costs for countries facing severe market pressure, break the downward spiral between sovereigns and banks, and reduce the risk of contagion across the euro area”, said Mahmood Pradhan, Deputy Director of the IMF’s European Department and mission chief for the euro area.
Speaking to IMF Survey—the IMF’s online magazine—Pradhan discusses recent economic developments, the outlook, and the policies needed to arrest escalating risks. He also looks at what it would take to spur the growth potential of the euro area.