‘EU economy at the risk of deflation and stagnation’

Europe is trapped by its own budgetary policy and it seems not to be able to get out of the crisis, with high unemployment rates and debt, Xavier Timbeau, Director of the French economic observatory OFCE's analysis and forecast department, told RT.

Xavier Timbeau says in a report on the EU economic situation that the eurozone crisis may hinder the world’s economy. Some countries might fall into deflation, while even strong economies such as German face limited growth.

RT:Presenting your economic predictions last month you said that the state of the eurozone is a problem for the global economy. What impact could the EU's financial troubles have?

Xavier Timbeau: It is a problem for the world economy because growth in the EU is very low and that would have consequences for the rest of the world. It would cause some trouble to the emerging countries because of the lack of demand from the eurozone. It is going to be the same for the US which is currently trying to recover from the crisis, or even Great Britain. But the main threat that the European economy [presents to] the world is the risk of deflation, and the fact that Europe seems not to be able to get out of the crisis and the high level of unemployment, and thus neither to reduce significantly its public debt nor its private debt – that is going to cause trouble to the world economy. That brings the threat of a [prolonged] and slow decrease in prices that will be similar to the deflation in Japan but on a larger scale and with a risk of what Larry Summers is calling “secular stagnation.”

RT:Brussels has cut growth predictions for the most economically powerful eurozone countries. What does that mean for the EU in the long-term?

XT: In the long term, and this is why it is also worrying for the future of Europe, it means that if you compare today’s level of investment in Europe to the level of investment in the US, then you’ve got a very striking picture. Investment has been decreasing as a share of GDP since 2008 and it has never picked up since the beginning of the crisis. That means that Europe is currently not investing either [in a] public or a private [way], and in the long term that will cause a decrease in potential growth and the prospect for the European economy. That is also very worrying. The high level of unemployment is also going to provoke a decrease in human capital over the long term. A lot of people are educated but can’t find a job and are going to lose human capital because they are going to have a long spell of unemployment before finally finding a job. All this is putting more and more pressure and reducing potential growth.

RT:Should we expect any change in European economic policy because of this cut growth projection? What kind of?

XT: The change that we can hope for is [the clear understanding] in Europe that it is not working and it is a problem, and Europe is not going to get out of the crisis easily and you have to put in motion the right policies to do that. More and more people are trying to find what kind of policies can be helpful for getting out of the crisis. But the main problem of Europe today is that in the European debt crisis, during that moment, in order for the European Central Bank to intervene and to save the euro a lot was asked in terms of change and regulation around the budgetary discipline in Europe. That was made by reinforcing treaties and putting more rules in Europe regarding budgetary policy. Today, as a matter of fact, Europe is trapped into its own rules for budgetary policy which are setting a framework in which it is going to be very difficult to escape and change a policy. In a sense the economic policies in Europe are already written into treaties, so it is going to be very difficult to find another way.

RT:Sanctions against Russia are among the reasons for the growth forecast slash. How damaging are they proving to be to EU finances?

XT: This is probably playing an important role for Germany, and the bad performance of the German economy is closely related to the international tensions with Russia. For the rest of Europe, I think that mostly the problem is coming from inside of Europe. Of course, the international tensions are not helping but they have complex impact on the European economy because with the Russian embargo and sanctions a decrease in oil prices has come which is going to be positive for the European economy at least in the short term. That’s rather a balance for other European countries and Germany.

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