Eurozone Watch

In this week’s business cycle outlook from Deutsche Bank Global Markets ("Konjunktur und Märkte", June 23, www.db-rbf.de for DB customers), Thomas Mayer warns that some countries might have fallen in what he calls an "EMU Trap": According to his analysis, countries which have strong labour cost increases might fall into a position in which growth is slowing because competitiveness has badly deteriorated. With growth slowing, tax revenues are falling and outlays for unemployment are increasing, leading to a bigger budget deficit. In this position, a country cannot do much anymore: Cutting the deficit further would lead to even slower growth while there is no possibility to improve competitiveness quickly.

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