To its credit, the IMF appears to be continuing its newfound role as the provider of a reality check to European policymakers. While these policymakers are complacently claiming that the worst of the Euro crisis is behind us, today the IMF issued an updated forecast suggesting that the overall European economy will contract by 0.2 percent in 2013, with very much sharper contractions to be experienced in Italy and Spain. This would make it the second consecutive year of economic contraction in Europe. The IMF is also warning that the European economy continues to constitute the main risk to the global economy.
A disturbing aspect of the IMF’s forecasts is that it confirms that the European recession is now deepening even before Europe has regained its pre-2008 crisis level of output. Comparing the European economy to that in the US provides a further indication of how poorly the European economy is performing. As can be seen from the chart above, while the US economic recovery since 2009 has been the slowest post-war economic recovery on record, the US economy has substantially overshadowed that of Europe. Since 2009, US output has increased by 5 percentage points more than in Europe. At the same time, US unemployment at around 8 percent is only around two-thirds the 11.8 percent unemployment rate presently being experienced in Europe.
While the IMF correctly identifies Europe’s poor economic growth prospects, it stops short of identifying the true underlying cause of Europe’s economic malaise. Rather than point out the destructiveness of major fiscal austerity in Europe at a time of recession, within a Euro straitjacket and within the context of a widespread European credit crunch, the IMF clings to the forlorn hope that structural reform and a move towards a banking union will revitalize the flagging European economy. Sadly, the IMF seems to be setting itself up for another downward revision of its European economic forecast by the time of the IMF Annual Meetings this April.