Analysts warn Euro area crisis is not over as predict dire 2013

Ben Southwood
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REINFORCING Bundesbank president Jens Weidmann’s denial that the Eurozone crisis was over, analysts yesterday forecast that 2013 would be even harsher than 2012 for the Eurozone economy.

The euro area will suffer a 0.7 per cent hit to its economy in the coming year, Morgan Stanley said, on top of the 0.5 per cent its GDP shrunk last year.

The forecast is worse than the 0.5 per cent decline Morgan Stanley predicted in November, before top bloc figures including European Central Bank president Mario Draghi and European Commission boss José Manuel Barroso said the worst of the crisis was over.

But Morgan Stanley economist Elga Bartsch said austerity in the Eurozone was a good thing despite detracting from the area’s GDP.

Bartsch said sometimes a crisis was necessary to push through long-term reforms that hurt in the short run, like the structural reforms currently being carried out in the euro area, which will slim down the size of their large public sectors, and reduce red tape in labour and other markets.

But a forecast from Ernst & Young, published this morning, predicted that though the bloc would lose a chunk of output over 2013 as a whole, it would rebound back into growth by the end of the year, and grow 1.1 per cent in 2014.

“There have been many false dawns along the road to recovery in the Eurozone, and this may yet prove to be another,” said Ernst & Young’s Mark Otty. But Otty said firms he talked to were getting increasingly confident about the economy and planned to boost investment.