The European economy going into 2014

The Eurozone banking union deal gives the European economy a positive ending to 2013. According to The Conference Board, the deal will help the long-term stability of the monetary union.

Conference Board authors, Bert Colijn, Martina Fazio and Klaas de Vries, note that the agreement still contains components which could potentially make the process of bailing out banks ‘complicated’. However, they add that the measures do appear adequate to protect governments from financial disaster if banks default.

The authors wrote “It will take ten years before the system is fully operational and there are questions about how solid its transition phase is. Still the agreement is definitely a step forward in terms of a more stable monetary union.”

There are some signs that the economy of the Eurozone is recovering moderately. December’s Purchasing Managers Index (PMI) for the euro area rose to 52.1 from 51.7 the month before, but is still lower than it was four months ago.

It appears that France may be entering another recession and has become one of the Eurozone’s ‘peripheral countries’. France’s manufacturing PMI fell to 47.1, a seven-month low.

Germany’s IFO Business Climate Index, on the other hand, rose to 54.2 from 52.7. Germany has a much better outlook for 2014 than France.

Risk of deflation

Going into 2014, the authors highlighted the following concerns regarding the European economy:

  • Inflation, which was already extremely low, has slid even further during the last few months. The Eurozone November’s annualized inflation rate improved slightly to 0.9%, compared to 0.7% in October.
  • Deflation is a worry as it could spread from Greece and Cyprus, which currently have prices falling (annualized) at -2.9%.
  • Near-zero inflation – in Spain, Ireland and Portugal inflation rates.

The authors commented “With growth expected to barely recover in these countries and domestic demand likely to remain low, concerns about a slow growth and deflation scenario in 2014 seem to be justified – and worrisome.”