MACROECONOMIC OUTLOOK IN EUROZONE

European Commission has recently published the interim forecast for GDP, inflation, unemployment and balance of payments in the euroarea (link). The financial crisis and recessionary downturn induced by a negative demand shock have virtually stalled the European economy. The Commission predicted a -1,8 percent GDP decline and further forecasted a modest recovery starting in Q1 or Q2 in 2010.

In a comparative perspective, while the Japanese economy is facing an incredible -10 percent output gap (link) and prompting the government to infuse fiscal pumps, the US economy is set to decline by about 1.6 percent annually in 2009 as predicted by the IMF (link), but the US economy is expected to recover more responsively than the Eurozone. Eurozone's weakening domestic economy is a lingering worry for a long-term growth perspective. Germany, the main trading partner to European economies, is expecting -2,3 percent economic growth in 2009. France's GDP is set to plummet by 2,3 percent while Italian economy is expected to shrink by aout 2.0 percent annually. Basically, the eurozone is facing asymmetric shocks when different sets of fiscal policies throughout the continent impede the smooth functioning of optimum currency area and its monetary policy.

Following a dramatic fiscal expansion in all Eurozone countries (For instance, Slovenia's public debt is expected to soar from 23 percent in 2008 to 38 percent of the GDP in 2009), policymakers and interest groups have pledged a call for protectionism in labor market, public sector and trade. There is no doubt that tight and highly regulated labor market is causing European sclerosis - the inability of European economies to catch-up the U.S level of productivity and purchasing power parity.

An obscure size of European public sectors is the second sign of European sclerosis leading to higher-than-natural rate of unemployment, wage pressures and deadweight loss in the labor market when inelasticity of labor supply creates job-search disincentives resulting in a regulated labor market and a spiral of wages that is far behind the real level of productivity.