POOR GROWTH FOR EUROPE IN 2006

The disappointing growth outcome for 2005 will persist in Europe and reflects the European weakness in the era of globalization

 According to several consultants and strategic consulting firms, for the year 2006 Europe will deceive the financial world. The consulting firm Oxford Analytica points out that the disappointing growth outcome for Europe for 2005 reflects the particular weakness of the core euro area economies in an instable global economic environment, as well as the asymmetries of policy making. There is little prospect of improvement in either the performance of key national economies or of policy reform in the year ahead.
 At the beginning of 2005, there were confident expectations by most official forecasting institutions that the euro area would continue its tentative recovery following growth of 21% in 2004. The stubborn refusal of the euro area economies to match such optimistic expectations can be explained not simply with reference to the marked rise in crude oil, but also to the misinterpretation of the dynamic potential of the bloc' s core economies.
 The euro area has been characterized by significant disparities in the contribution o individual factors of demand to overall growth. Above all, the weakness of all categories of domestic demand in the core economies over the last two business cycles has produced an over-reliance on exports as the main motor of growth. Confidence indicators suggest a slight improvement next year, but not one which suggests any pressure on capacity, the utilization of which remains moderate. This asymmetry of demand remains the primary political challenge to the member states of the euro area, both individually and collectively through their shared policy framework.
 The interrupted recovery of the euro area economies means that growth remains insufficient to generate any improvement on the employment front, in particular to halt the rise in aggregate unemployment in the euro area for the year from 8.6% to 8.7% or more. The combined effect of productivity improvements and the outsourcing of labor-intensive processes in both manufacturing and the service sector means that unemployment in the euro area will only show noticeable signs of improvement when annual gross domestic product growth in consistently above the 2% level. This is arguably unlikely before 2007.
 Annual inflation is set to continue above 2% target of the European Central Bank (ECB), but only marginally. The resilience of the euro area to the effects of the virtual doubling of crude oil prices since 2002 can be largely ascribed to the successful reduction of the oil dependency of production in the European Union since the early 1970s. The European Commission' s latest monthly report on the current business climate showed a further improvement in the overall economic sentiment indicator in both the EU and in the euro area. Nevertheless, economic sentiment is still far from rosy.
 The euro area' s asymmetries of demand correspond in part to a set of political preferences, which seek to maximize the export competitiveness of European economies against the background on intensified global competition for both export and capital markets. The policy architecture of the euro area serves this set of preferences through the independence of the ECB and the primacy of counter-inflationary monetary policy over other macro-economic goals. In the absence of fiscally driven growth stimuli, the ECB has pursued a policy of benign neglect in maintaining a generally low level of central bank refinancing.
 However, with the euro area inflation edging upward and, above all, with the persistent overshoot of money supply (M3) growth the ECB' s declared targets, it is likely that the ECB made the first of a number of minor upward shifts in the rate at its last meeting. Given the acknowledged weakening of euro area growth and the downward revision of growth forecasts for next year, there is a real danger that such rate moves will negatively affect small and medium-sized enterprises.
 Euro area fiscal policy, even after minor changes to the Stability and Growth Pact, remains locked into an anti-inflationary imperative which effectively excludes the possibility of concerted short-term anti-cyclical measures. In the short term, the structural reform of the euro area' s labor markets will also have a negative impact on household demand as the primary vehicle of economic activity. This places an inordinate burden on the increasingly blunt monetary policy instruments.
 The euro area will continue to grow at a level insufficient to reduce unemployment and its associated social costs. Only a reappraisal of its currently dysfunctional policy architecture will break the current cycle of low growth and mass unemployment.