Wednesday, 24 October 2012

The Worst Isn't Over. Or is it?

Yesterday, German Finance Minister Wolfgang Schäuble uttered what I have been saying for months now: "I'm not so sure that the worst of the crisis is behind us"
Source: Wikimedia Commons

On the other hand European Commission Vice President Olli Rehn told the Bangkok Post a week ago that: "there is no likelihood of any country leaving the euro zone. The key message I told the ministers was that there is cause for prudent optimism. I think that the worst is over for the euro debt crisis."

So who is right and who is not? Is there reason for optimism or is pessimism a better strategy in anticipating the future? I guess Rehn was right for the first part of his statement. There is indeed a very small likelihood of any country leaving the euro zone. And this is sufficient enough for everyone to note progress. Actually, compared to the Kassandras of the summer, where predictions even specified the day of Grexit or Itexit or any other exit, this is indeed an action which promotes solidarity amongst the EU. 

Alas, the near future does not appear rosy. It is more than obvious that although much has been done towards addressing EU's tantalizing problems, the time for them to end completely is yet to come. Greece is doing much better than before, yet with new austerity measures to be applied before the end of 2012 (hopefully they will reach an agreement with the Troika soon, as the negotiations are really starting to get annoying to the people watching) another deep recession is feared. In Cyprus and Spain, the memorandum currently under discussion is also expected to bestow a deeper recession in the countries in 2013. And although Italy is holding up well, if Monti is not re-elected as Prime Minister in the April elections, then the country's future may be at stake. Unless of course his successor is much better than he is. 

Schäuble seems to be correct in his prediction yet up to a point. In the short-run,  and I mean until the end of 2012, the crisis will almost certainly get worse. I believe that statistics to be announced from the ECB will indicate that the EU27 as well as the EA17 will officially be in recession. As for 2013, it would depend on how well the nations are coping with the austerity measures. Although the effects of a memorandum in Spain and Cyprus are expected to drive consumption and GDP down, this does not mean that after mid-2013 the nations' economies will not bounce back. (Given the size of these economies, it will be easier for Cyprus to bounce back. Nevertheless, Spain's start-ups and innovation may play an important role and allow it to bounce back faster) The same holds for Greece, although a full-blown recession is expected yet again for 2013. However, the contraction might be less in the end of 2013.

In the words of Yogi Berra: Prediction is very difficult, especially about the future.
And as Schäuble has stated on the Greek "experiment": "We are all sinners"

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