Mixed Economic Prospects for 2015

The professor at the Ljubljana Economics Faculty sees significant variations in the pace of the recovery in major economies. "Whereas the US and the UK to a lesser degree have established a solid basis for stable growth, Japan and the eurozone continue to face barriers to recovery."

The difference in the state of these economies is reflected in announcements that the US and the UK will slowly wind down quantitative easing measures, while the ECB and Japan are only now starting to open the taps.

When combined with slowdown in emerging powerhouses China and Russia, the outlook for the global economy is mixed, says Mrak. The US has returned to pre-crisis growth level and will act as the motor of the global economy. While Japan is forecast to continue growing at this year's rates, the eurozone remains the biggest enigma.

Growth continues to be weak and varies greatly from member state to member state. "Low prices of crude oil could contribute to quicker growth and a drop in employment, but there are also increased downside risks present."

Mrak points to the threat of deflation, the unfinished restructuring of the banking sector, over-leveraged real sector and high public debt as limiting factors to growth. Adding to this in 2015 will be political risks.

"This includes the growing influence of eurosceptics on economic policies in the EU, which could gain a major boost after the upcoming Greek presidential elections, and risks related to the elections in Great Britain and its effects on the potential exit of the country from the EU."

Meanwhile, the biggest political risks are represented by the crisis in Ukraine, which could have long-term consequences for EU-Russia relations and subsequently for the EU energy market, and the crisis in the Middle East. The development of EU-Turkey relations remains a strategic issue in relation to both crises.

Mrak highlights that the EU has lagged behind the International Monetary Fund (IMF) in admitting that the excessive focus on reducing public debt was a mistake in responding to the crisis. While it has made adjustments, these have been mostly cosmetic and the response is still founded predominantly on the consolidation of public finances.

"This universal panacea has proven to be wrong in a number of cases, which comes as no surprise given that the eurozone crisis was not primarily a public finance issue, as demonstrated by the examples of Spain and Ireland, but rather a balance of payments issue."

Mrak highlights that such a crisis needs to be tackled with adjustments in countries facing deficits in their balance of payments as well as in those with surpluses. If Germany and other countries with surpluses are not ready to contribute by adjusting through higher consumption and investments, the adjustments in the countries with deficits will be much harsher than would otherwise be required.

"What are we doing now? Even though we know that the fundamental concept of tackling the crisis is not suitable for all countries, it remains unchanged formally speaking, while at the same time efforts are being made to find interpretations for putting greater emphasis on growth."

In this respect, Mrak believes the outcome of the negotiations between the European Commission and France on reducing its budget deficit and success in implementing Commission President Jean-Claude Juncker's investment plan will be key developments.

Moreover, Mrak believes it is unavoidable that the ECB turns to quantitative easing early in 2015 to respond to the threat of deflation. "It has avoided this due to the differing opinions of individual members about non-classical monetary instruments...and despite it being launched with certain legal risks, it is absolutely necessary from an economic point of view."

"We have to keep in mind that, due to political reasons, the eurozone cannot afford a longer period of economic stagnation...As opposed to Japan, which stagnated for more than a decade without major affects for its political stability, long-term stagnation in the eurozone would likely not be politically sustainable in the current institutional makeup."

Mrak therefore seas quantitative easing as a key measure in addition to reforms in individual member states. "Countries with excessive deficits should continue gradual consolidation of public finances in 2015, while many should also focus on structural reforms, especially in the labour market, education and competitiveness."

Meanwhile, countries with more fiscal room should take measures to boost investments and consumption. This would be especially welcome from Germany, he says.

Over the long run, EU members will have to face public finance challenges related to population ageing. "Let me be very clear. The public debt of many eurozone countries has already reached a level that represents a serious barrier to long-term growth, which is why...they will have to find a suitable mix of measures to reduce it."

Source: SloveniaTimes

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