Eurozone Watch

Roughly ten days ago, I discussed the differences in the policy debates concerning fiscal stimulus on both sides of the Atlantic in this blog, stating that there is an enormous intellectual gap between the European and US debates. While US economists are becoming increasingly comfortable with using discretionary fiscal policies to stabilize the economic cycle, German and European economist are still opposing this idea for fundamental ideological reasons. Some readers, including Daniel Gros, have claimed that the divide is mainly a result of a more sound situation in EMU which still seems to be far away from recession.

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Only few media today recorded yesterday's celebration of the 45th anniversary of the Elysée-Treaty, which back in 1963 laid the foundations for the closest and most impactful bilateral relationship within the EU in the post-war period. This small interest is hardly surprising, as festivities did take place, but were downscaled in the sense that the German and French Heads of State and Government kept away and this occasion was not used for any kind of political declaration. Celebrations were left to the two coordinators for Franco-German relations, Secretary of State Günther Gloser and the French junior minister for European Affairs, Jean-Pierre Jouyet, and also to the many actors who make the relationship work in practice (meaning both in politics, the administration, the military, civil society and so on).

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Over the past weeks, the economic environment has significantly clouded on both sides of the Atlantic. In the US, odds have risen substantially that the economy will slip into recession. At the same time, the European economy has also developed signs of weekness: Consumption seems to have flat in EMU at the end of 2007 with GDP growth dropping significantly from the still robust paste of the past summer. Odds are that at least some of the EMU economies might come close to stagnation in the first half of 2008. Any large unexpected shock might now be enough for Europe to follow the US into a recession.

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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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