If the first step towards crisis resolution is recognition of a problem, this morning’s decision by the ECB to slash its European economic growth forecast has to be seen as a positive development for the European economy. For it suggests that the ECB might finally be moving out of denial as to the severity of the economic crisis in the European periphery. It might also suggest that the ECB is a step closer to recognizing that the policy path on which the European economy finds itself needs to be changed.
The ECB’s revision of its economic forecast coincided with Eurostat’s release of third quarter 2012 European GDP numbers. These showed that the overall European economy contracted for a second consecutive quarter, which puts Europe in a technical recession. In the context of very weak economic data, the ECB is now acknowledging that far from growing, as had earlier been expected, the European economy could contract by around 0.3% in 2013 before staging only a modest economic recovery in 2014. Needless to say, the economic recession in the European periphery would be a lot deeper, with countries like Spain and Italy each likely to contract by another 2% in 2013.
Were the ECB’s forecast to materialize, Europe’s overall unemployment rate would almost certainly rise to over 12% and stay at these postwar record levels for the next two years. It would also seem probable that European inflation would decline to the 1.6% level that the ECB is now projecting for 2013.
Now that the ECB seems to recognize the bleakness of Europe’s economic outlook, one would hope that it moves soon to a very much more accommodative monetary policy stance. More important yet, one would hope that the ECB now throws its support behind IMF proposals for an easing of the degree of fiscal austerity to which countries in the European periphery are now being subjected as well as for official sector debt relief for grossly over-indebted countries like Greece.