Eurozone Watch

Second part of our series on the winners and losers of the current crisis 

Only a few months ago, most observers would have been very sceptical whether the Lisbon Treaty could be saved with a second Irish referendum. While now property prices in Dublin are falling like bricks and unemployment and the budget deficits are skyrocketing, also the mood towards the Lisbon Treaty has changed.

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With the world economy tumbling ever deeper into the economic abyss, it is exceedingly hard to find a single positive aspect of the crisis. Given the speed and momentum the downturn has reached, no sector of the economy seems immune to the fall-out of the contraction. Orders are being cancelled everywhere and business is down from manufacturing to services, even if the last are yet less affected.

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This is the second part of our Eurozone Watch outlook on 2008. We discuss the impact of major political events in EMU member countries and assess potential developments in EMU economic governance. You can read our outlook on the EMU's economic developments in 2008 here.

Will the French EU Presidency help improve EMU governance?

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One year ago, we forecast on Eurozone Watch the economic developments in the Euro area for 2007 with a surprising accuracy (see our ex-post analysis here ). As promised, we would like to present now our predictions for 2008, with this first post covering economics and a second post over the coming days covering the politics of the euro area.

Will the credit crisis push the Eurozone into a recession in 2008?

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In our second part of "Predicting 2007: How well did we do?" we review our predictions on Eurozone politics in 2007. It complements the analysis of our economics forecast posted here.

As far as the politics of the Eurozone are concerned, we were less optimistic for the year 2007 than for the economics outlook which we rightly saw as more positive than the mainstream. Regarding the governance of the Eurozone, we were convinced that the recent suggestions and political disputes over EMU issues would lead to little or no evolution of the real governance set up. We will review the different elements we discussed in early 2007 below.

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Almost a year ago, in the first days of the then young year 2007, we posted two contributions on Eurozone Watch making five predictions each on the economics and politics of the Eurozone for this. Before we will present our predictions for 2008 in the first days of the next years, it is time to look back and see how we did in 2007.

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Starting from today, we will have a cooperation with RGE Monitor, the financial information website of Nouriel Roubini. In future, most of our posts on Eurozone Watch will be co-posted in Nouriel's new Europe EconoMonitor Blog, where we will be part of a group of 25 economists commenting on European economic development. We are very excited to be part of this endeavour and are looking forward to many challenging debates on the blog.

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In a new NBER working paper, Barry Eichengreen presents an in-depth analysis of the odds and possible consequences of a break-up of the euro area. (Unfortunately, the full-text is only available to subscribing institutions, but you can find a draft version on Barry Eichengreens's personal website.) The paper is the most comprehensive and coherent analysis of the political economy of a possible EMU break-up so far, even if one concludes studies distributed by investment banks such as HSCB, Société Générale, Morgan Stanley or Deutsche Bank to their clients only.

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We have just published an article in the German weekly DIE ZEIT calling for a reform of European budgetary rules in order to limit the national governments' pro-cyclical fiscal policies.

We start from the observation that fiscal policy once again is turning pro-cyclical in a number of European countries. Germany is cutting corporate taxes and increasing discretionary spending at a moment when the economy is growing with rates close to 3 percent (see our post here). France's new president Nicolas Sarkozy is cutting income taxes for home buyers and overtime payment in a boom, providing an ill-timed boost to the economy (see post here) and the Italian government has just increased their deficit target from 2.3 to 2.5 percent of GDP inspite of strong tax revenues (the money supposedly will go into more social spending).

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Yesterday, we had our long-time announced conference on EMU divergences in Berlin, sponsored by Nouriel Roubini's RGE monitor , the Stiftung Wissenschaft and Politik and the Arbeitskreis Europäische Integration.

From early morning until the evening, the day was packed with presentations and discussions whether certain economic developments in the euro area since its start have been pathological (see the programme and papers here). For us from Eurozone Watch, it was especially interesting to see how many serious economists, political scientists and policy makers are now interested in the topic of cyclical divergences, the discussion on which Eurozone Watch has been pushing since its launch a year ago.

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