Eurozone debt crisis: Impact on the economy

The euro area economy initially bounced back only hesitantly from the economic crisis 2008/2009. However, Allianz assumes that economic growth accelerated markedly in the second quarter and will reach 1.5 percent this year and 1.7 percent in 2011. “The euro area economy is strong enough to cope with a gradual exit from expansionary fiscal policy. This economic tailwind will help overcome the debt crisis,” said Michael Heise, chief economist at Allianz.

Two aspects are pivotal for the economic outlook. On the one hand the government savings packages, on the other the depreciation of the euro. According to Allianz calculations, the savings packages will reduce eurozone gross domestic product by 0.3 percent to 0.7 percent in 2010 and by 0.5 percent to 1.2 percent in 2011 via a reduction in aggregate demand. On the other side, a 10 percent depreciation of the euro will increase gross domestic product by an estimated 0.6 percent to 0.7 percent after four quarters and by 0.8 percent to 0.9 percent after two to three years. Heise: “All told, the negative economic impact of the savings packages and the positive effects of the decline in the euro will more or less cancel each other out. Public-sector consolidation is therefore unlikely to put an end to the recovery.” Ultimately, successful public-sector consolidation will strengthen confidence in the economic outlook and thus buoy domestic demand in the medium term.

However, the consolidation requirement in the individual eurozone countries varies. In most eurozone countries the scale of the recently passed austerity drives ranges from zero to 0.5 percent in relation to gross domestic product this year. But in Spain and Portugal the consolidation measures add up to 1½  to 2 percent of GDP in 2010, in Ireland the figure is 4 percent and in Greece more than 8 percent. This underscores the scale of the task ahead.

According to Allianz, the eurozone faces further enormous challenges, alongside overcoming the debt crisis. “The Stability and Growth Pact needs to be overhauled, resolute budgetary monitoring introduced and the competitiveness of eurozone countries with large foreign trade deficits improved. If this is tackled decisively, the euro can emerge strengthened from the crisis,” said Heise.

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