Eurozone Watch

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.

As at the time of making our predictions, a number of blogs called them to be implausible in the combination, overly optimistic or just noted our out-of-consensus-calls (see here or here ), we would like to make some evaluation of our economic predictions (we borrow this idea from Nouriel Roubini). What sticks out is that we did surprisingly well – so well that we were ourselves surprised and that we have to credit a significant part of the success to pure luck. But let's have a look at the details – first at our economic predictions and in a later post over the coming days at our political predictions:

1. We predicted that the upswing in the Eurozone would continue, "albeit at a slower pace" and predicted Eurozone growth at "slightly above two percent, after slightly below three percent in 2006". When we made this forecast, we were clearly above consensus with this view as most economists did not trust the stability of the European upswing. In fact with everything now pointing at a annual growth rate of about 2.6 percent, our forecast was much better than most for the Euro area.

2. We predicted that the ECB would increase interest rates "to 3.75 percent in the first half of the year by a further 25 basis points later on". At that time, most economists still did not believe the ECB would see any need to hike that far, with the average forecast for the ECB rate for the end of 2008 standing at 3.75 percent according to the FT Deutschland. In fact, we got it almost right to the point: The ECB hiked up to 4.0 percent, and the last hike came in June, so at the end of the first half of the year, but nevertheless, this call was quite accurate.

3. We predicted that the "euro will most likely further gain in value. There is a significant risk that it rises above 1.40 $ in 2007". This was against the consensus call that the euro would stabilize around 1.30 $. Well, in fact the euro strongly gained in value and went from 1.30 $ to a new record high of 1.48 $. Even if we did not predict the new record high exactly, we are strongly inclined to count this as a hit as well.

4. We predicted that economic divergences in EMU were set to grow but not to be noticed overly much. This turned out to be true: Unit labour costs in Germany, which has already gained a lot of competitiveness over the past years, again increased much more slowly than in the rest of the euro area (0.8 percent compared to 2.0 percent in Spain, 1.3 percent in Italy or 2.1 percent in France). Germany again recorded the strongest export growth of all EMU countries which the problem country Italy recording the slowest export growth. However, due to the good cyclical development, all this was not a big issue in the Euro area in the past year. We also predicted that growth in Finland and Ireland would moderate – as it in fact did.

5. We predicted that both Italy and Portugal, the two problem cases of EMU, would not do much better in 2007. According to the latest figures from the EU, Italy should have recorded a GDP growth rate of 1.9 percent in 2007, the same rate as in 2006. Portugal has grown by 1.8 percent after 1.3 percent in 2006. While Portugal's growth has accelerated marginally, both countries still are the laggards of EMU with their relative per-capita-income falling. We would at least count this as a half point.

So, in total, we got about 4.5 of our 5 economic predictions correct for this year. Given that we do not have much support staff (in contrast to professional financial sector economists), we think we did quite well. The only downside is that we now have laid the bar quite high for the next year. Nevertheless, we will post our forecasts for 2008 in the first days of January.

Read next: How we performed with our political forecasts.

P.S.: Merry Christmas to our readers!

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