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Ernst & Young Eurozone Forecast

Autumn editionSeptember 2010

Foreword

This forecast makes for sobering reading. While the Eurozone economy

performed better than expected in the second quarter, our forecast is for

growth to fall back and to remain low and diffi cult for the foreseeable future.

The fundamental competitiveness challenge we face in Europe contributes

to only moderate growth and the impact of fi scal retrenchment is forecast

to reduce this modest growth rate by up to 1%.

Mark OttyArea Managing Partner, Europe, Middle East, India and Africa

Fears of a double–dip recession have

somewhat receded — at least in Europe. But

that is little comfort to millions of businesses

— and their employees — throughout Europe

who had just gone through two years of

severe recession and widespread economic

uncertainty and hoped for better times

ahead. Company strategies and business

plans were, to a greater or a lesser extent,

based on a return to steady expansion.

This now seems unlikely.

Talking with business executives across

the region, we fi nd a continuing concern

about future prospects. Investment decisions

are being delayed and recruitment — if not

frozen, has slowed. Indeed the forecast shows

that unemployment — already high — will

continue to rise till mid-2011, as cuts in

the public sector will not be compensated by

private sector growth.

Access to capital is a critical factor. Although

most banks passed the stress test, many

continue to seek to build their capital base,

and companies report diffi culty in securing

loans. Many companies are now seeking to

fund their growth from their cash reserves,

which is prudent, but tends to result in more

incremental actions and slower growth in

the short term.

Similarly the impact of government savings

is forecast to be signifi cant. Essential though

many of these savings are in the longer term,

there continues to be debate about both their

scope and their timing. It will be interesting

to see how much of the retrenchment is

actually enacted in the face of economic

challenge and a potentially hostile public.

And the gap between the countries in the

north and in the south is expected to grow,

adding to the pressures and complexity of

decision-making for the Eurozone. While

the expectation of a collapse of the Eurozone

has reduced, the risk of default by one of the

members remains real and the consequences,

were this to occur, would be severe. The

constraints on what is already a highly

political process are likely to increase. Clear

and quick decisions are likely to be harder.

Many were surprised by the performance

of the Eurozone in the second quarter.

The stronger-than-expected growth in

Germany and some of the other northern

European members provided a knock-on

boost to the Eurozone as a whole. And there

are clearly lessons to be learned from

advanced developed economies, winning

market share in the global market for

manufactured products and services. It paints

a potential future route for other developed

markets and offers interesting insights into

the role of innovation, exports, productivity

gains and sustainable shareholder

expectations. Whether these factors can

be emulated by other countries — where

short–term profi t maximization is perceived

to remain the dominant corporate goal —

is harder to predict.

The longer-term future for the Eurozone

— and adjacent markets — is becoming clearer.

Looking forward, we seek an increasingly

competitive landscape for European business.

In the face of market variation, the issue

of customer reach has assumed a new

importance. Given increased market volatility,

the challenge of organizational agility to

respond to the brief windows of opportunity

has hugely increased. Depressed domestic

markets and new entrants, especially from

emerging markets, will see downward price

pressure for business — even while commodity

and energy prices rise. Sustainable cost

competitiveness is at the top of most board

agendas — along with improved risk

management and more transparent reporting

to their stakeholders.

We all have a role in determining how Europe

will respond. Creating stability and growth

demands a political leadership that can

remove uncertainty from a regulation

and tax perspective, reform our labor

markets and make a renewed commitment

to investment, training and innovation. It also

demands a business leadership that is

actively engaged in this debate and taking

the right decisions within their organizations

to compete for growth in the new environment.

I encourage you to visit our dedicated

Eurozone website — www.ey.com/eef — for

additional information on the Ernst & Young

Eurozone Forecast and the16 individual

country forecasts it comprises.

Published in collaboration with

1Ernst & Young Eurozone Forecast Autumn 2010

Ernst & Young Eurozone Forecast

Autumn 2010

Growth setback to hurt business 2

Highlights 6

Is the best already behind us? 8

Forecast for Eurozone countries 18

Germany 18France 19Italy 20Spain 21Netherlands 22Belgium 23Austria 24Greece 25Finland 26Ireland 27Portugal 28Slovakia 29Luxembourg 30Slovenia 31Cyprus 32Malta 33

Detailed tables and charts 34

Forecast assumptions 34Eurozone GDP and components 35Prices and costs indicators 36Labor market 37Current account and fi scal balance 38Measures of convergence/divergence within the Eurozone 38Cross-country tables 39

2 Ernst & Young Eurozone Forecast Autumn 2010

Growth setback to hurt business

It’s not the double–dip we feared, fortunately, but that is of little comfort to millions of businesses throughout Europe that have just gone through two years of severe recession and widespread economic uncertainty and saw better times ahead. Company strategies and business plans were, to a greater or a lesser extent, based on a return to stable steady expansion. This will now not be the case.

Despite the positive outcome of the stress tests, European banks are currently facing a very diffi cult time. As Eurozone governments withdraw their fi scal support, the banks must refi nance and reduce their dependence on government guarantees and, in some cases, stimulus. Banks are reluctant or unable to simultaneously meet the need from companies and the private equity sector for loans. Squeezed between these two factors, the banks are rationing their credit, with much reduced banking activity.

Government approaches to the bailout of the banks have differed across the region, but there is also uncertainty as to what might happen with future taxes and levies for the fi nancial sector. Proposals for a fi nancial transaction tax as well as other bank taxes — with the purpose of building funds for future potential crises — have been on the agenda for both the G20 and the EU. However, neither the G20 nor the EU has been able to reach an agreement. A common fi scal policy is a complex discussion and it would be extremely

diffi cult to execute common tax laws at a global level. It would require high and probably currently unachievable levels of worldwide coordination between policy-makers and the revenue authorities.

Diffi culties in the banking sector will also dampen wider business activity. Many banks need to clean up their balance sheets. New capital adequacy rules and uncertain prospects for outstanding loans mean there will be further write-downs, which will further reduce lending capacity. Spanish, Greek and Irish companies may fi nd it particularly diffi cult to raise bank fi nancing as commercial funding fl ows from abroad to local banks are disappearing. Borrowing from the European Central Bank will fi ll some of the gap, but not all. It is likely that businesses in these countries will be reluctant to rely too much on bank credit — if it can be obtained at all — as the precariousness of bank refi nancing means future long-term fi nancing opportunities are expected to be very limited.

Businesses are being hit in a number of other ways. Declining consumer confi dence and consumer spending — as a result of rising unemployment from 9.4% in 2009 to 10.3% in 2011, tax increases and tight credit – mean bleak days ahead for residential construction, building material suppliers and related sectors. The recent upturn for carmakers and downstream retail businesses is expected to prove very short-lived, especially as state scrappage

schemes are now being phased out. With ample capacity to meet existing and anticipated demand, fi rms in most industries will opt to conserve cash and shelve any expansion plans.

The effects will, of course, be worse for some areas than for others. The German travel industry, for example, will be negatively impacted by the newly announced tax on overseas fl ights, which the German Government is introducing as part of its fi scal consolidation drive. On the positive side, however, employers' reluctance to recruit in the uncertain climate may, as is the case in France, benefi t temporary staffi ng companies. Some retail companies will be hard hit, but those that offer affordable goods and services will do better.

Geographically, the differences will be very pronounced. Greece, Spain, Portugal and Ireland are undergoing sweeping austerity programs and unemployment is continuing to rise from already high levels. In such an environment, households and businesses will become risk-averse and be very selective in their outlays. Nevertheless, in Germany, the Netherlands, Austria, Finland and other members of the “Eurozone North” club, the picture is less bleak. Strong exports to emerging markets and elsewhere have boosted employment, investment, earnings and confi dence in the last six months. Although these conditions will not persist, the downshift will not be as dramatic as in the South.

Many industries will see a marked worsening in their prospects

as Eurozone growth slows sharply.


Public sector fi scal tightening is a must in the aftermath of the largest expansion of government aid in half a century. But with the recovery still very fragile, fi nance ministries must tread carefully. So far, the implications for companies have been minor as austerity measures have generally been announced but not yet implemented.

Uncertain foreign trade prospects are affecting the export-dependent nations in the bloc’s Northern part. But the picture is varied. Leading German engineering fi rms continue to report robust demand

from China and other important Asian economies such as India, Indonesia and Vietnam, as well as Latin America and Africa. This partly compensates for the expected weakness of the US market. Spanish companies may not have much exposure to Asia, but in the energy, banking and telecoms industries they have substantial revenue streams from operations in Latin America. Eurozone export companies have become more competitive due to the recent fall in the euro rate. The currency is expected to remain weak at least until 2012.

In a related development, globalization remains a potent force for Eurozone fi rms. As demand for outsourcing and offshoring services keeps rising, companies will remain active. Locating larger parts of the supply chain in low–cost countries remains a key to profi tability in many industries. Pricing power thus becomes elusive, even in industries where supply and demand are more or less in balance. In some consumer electronics segments such as fl at screen television sets, prices have been falling by double-digit percentage rates annually.

1. Basel III – the scope and rigor of implementing these requirements is a risk that could put some banks out of business in meeting the liquidity requirements.

2. Some banks are still facing considerable currency and sovereign risk exposure.

3. The attitude of some European governments to the separation of retail and investment banking risks a shift of focus away from Europe.

4. The shift of money from Europe to emerging markets poses a risk that the European fi nancial services market would become a cash cow for the rest of the world, which would be very negative for the European economy, with job losses and damage to the fi nancial services sector.

5. The combination of all four of the above risks adds to the creation of negative sentiment and a hostile environment. Business needs a stable and benign environment in which to fl ourish.

Top 5 risks for the fi nancial sector


The infl ationary pressure is due mainly to strengthening commodity prices. Yet, these are not uniformly trending upwards; natural gas prices have collapsed both in Europe and globally because of lower–than–anticipated demand and a boom in shale gas exploration. But crude oil remains a scarce resource, earning premium prices. The price per barrel is expected to average US$59.8 in 2010 and US$71.2 in 2011. This affects downstream energy companies and other fi rms.

In recent decades, the latter has been a net positive for the US as the value added is generally higher in the high-end services sector than in other activities. The Eurozone also has such fi rms, of course. Their contribution to the macro economy may often be diffi cult to track, but is evident in two of the smaller Member States. For example, Luxembourg and Malta have advanced fi nancial and other business services to thank for their strong performance in terms of projected GDP growth in 2010 (2.5% and 2.3%, respectively).

Overall, the services sector has the best growth prospects. This is due to households allocating more of their disposable income

to services than to goods, but also due to the growth of professional services to the business sector as a result of globalization and other corporate trends.

Major fi nancial market upheaval resembling the events of autumn 2008 is a possibility — albeit remote. The severity of the crisis for the Greek, Spanish, Portuguese and Irish economies, which is borne out by the steep risk premiums demanded by buyers of government bonds, is a worry for businesses all over Europe. The turmoil that ensued in the capital markets in the wake of the Lehman Brothers bankruptcy in September and October 2008 was felt throughout Europe and the rest of the world. The repercussions would, most likely, be even worse if one or several countries were to leave the Eurozone and recreate national currencies.

Companies can take a number of steps to respond to current macro–economic developments. First and foremost, it is important to have an overview of the developments in order to plan ahead and prepare for different scenarios when it comes to change in regulation, change in tax policy and the development on the credit

market. Companies can try to mitigate macro-economic risks by ensuring strong risk management control and a proactive approach.

How can companies in all sectors meet the challenges in the current economic environment? Studies made by Ernst & Young during the fi nancial crisis indicate that high-performing companies are consistently seeking to develop a broader and deeper view on their market opportunities. They are more innovative in strategy and structure than their competitors. High–performing companies are also broadening their understanding of risks in the market and tightening their execution and key support processes to mitigate risks and pursuing and attaining greater speed in making and executing decisions to take advantage of changes in the market.

Growth setback to hurt business


• Eurozone growth was surprisingly strong in Q2 2010, but this momentum is unlikely to be sustained as the economy is now facing strong headwinds. Investor relief on the publication of the European bank stress tests lasted only a short while and, in recent weeks, concerns about the banking sector have re-emerged. Moreover, fi scal retrenchment only became signifi cant in the middle of the year, with the full impact of the announced spending cuts and tax increases yet to come. And signs that the US recovery is slowing mean that exports are unlikely to be as strong a driver of recovery as previously hoped.

• Q2 is therefore likely to mark the peak in growth for some time. With a marked slowdown likelyin the second half of the year, Eurozone GDP is expected to rise by just 1.5% in 2010 as a whole and 1.4% in 2011. Eurozone unemployment is still expected to continue rising until mid-2011, peaking at more than 16.3 million.

• The stress tests suggested that the banking sector was in better shape than had been feared. Only a small number of banks failed and the amount of additional capital that European banks were required to raise was relatively small. Nevertheless, Eurozone banks have been tightening credit standards further, partly due to their own diffi culties in accessing funds and partly due to ongoing uncertainty about the outlook. So, while the potential collapse of a major Eurozone bank is not anticipated in the near future, tight credit is likely to continue to weigh on growth for some time.

• The impact of fi scal tightening measures is estimated to amount to around 1% of Eurozone GDP next year, following the neutral fi scal policy this year and a boost of about 1% of GDP in 2009. It is still unclear to what extent governments will be able to deliver on their fi scal plans and that uncertainty is refl ected in still very large spreads on government bond yields and fi nancial market volatility. So, while the dire scenarios of sovereign debt default or even an EMU break-up seem more remote than in May, such developments remain risks for the next few years.

• The Eurozone economy also needs to deal with a commodity-fuelled rise in infl ation. While infl ation rates remain relatively low, they are higher than would normally be anticipated in such weak economic conditions, reducing households’ and businesses’ purchasing power.

• In this context, Eurozone companies and households are likely to remain cautious. Businesses will probably continue to postpone recruitment and investment decisions, and precautionary consumer saving levels are likely to remain high.

• The European Central Bank (ECB) will therefore continue to face a diffi cult task balancing its desire to normalize monetary policy as quickly as possible with the risk of hampering a very fragile recovery. We expect that it will keep interest rates unchanged until mid-2011 and continue providing as much liquidity as banks need until shortly before that date.

Is the best already behind us?

Highlights


Spain

Portugal

France

Ireland

Finland

Netherlands

Belgium

Luxembourg

Slovakia

Austria

Slovenia

Italy

Greece

Malta

Cyprus

Germany

Please visit our dedicated Eurozone website for access to additional information on the Eurozone report, the 16 individual country reports and additional perspectives and interview content. The site contains the latest version of our reports as well as an archive of previous releases.

To fi nd out more, please visit www.ey.com/eef

• 16 Eurozone countries



Is the best already behind us?The Eurozone economy grew surprisingly strongly, with GDP up 1% in Q2 2010 — its highest since Q2 2006. However, as explained in this report, this momentum is unlikely to be sustained as the economy is now facing strong headwinds. In particular, investor relief on the publication of the European bank stress tests lasted only a short while and, in recent weeks, concerns about the banking sector have re–emerged. Moreover, retrenchment only became signifi cant in the middle of the year, with the full impact of the announced spending cuts and tax increases yet to come. And signs that the US recovery is slowing mean that exports are unlikely to be as strong a driver of recovery as previously hoped. Q2 growth is therefore likely to mark the peak in growth terms for some time.

Germany fuelling Eurozone growth in Q2 GDP growth was far from uniform across Eurozone countries in Q2 2010 and the contrast between the North/East of the Eurozone and the South was striking. Growth ranged from 2.2% quarter on quarter in Germany to -1.8% in Greece. GDP growth averaged 1.8% across the Northern/Eastern economies of Germany, Finland, Austria, Slovakia, Slovenia, the Netherlands and Belgium, but only 0.2% for the Southern economies of Cyprus, Italy, Portugal, Spain, Malta and Greece.

Not only was GDP growth in Germany the highest, but it seems to have powered growth in other Northern/Eastern Eurozone countries. Broadly speaking, looking at the Eurozone countries, the larger the share of exports going to Germany, the stronger the GDP growth in Q2. By contrast, in Greece, GDP growth was even lower than suggested by (the relatively) low share of exports going to Germany, due to domestic factors and, in particular, government retrenchment and the social tensions that erupted in May.

Table 1

Forecast of the Eurozone economy (annual percentage changes unless specifi ed)

2009 2010 2011 2012 2013 2014

GDP -4.0 1.5 1.4 1.7 2.0 2.0

Private consumption -1.1 0.5 0.8 1.3 1.5 1.6

Fixed investment -11.3 -1.1 1.9 2.6 3.0 2.9

Stockbuilding (% of GDP) -0.5 0.7 1.0 1.1 1.3 1.5

Government consumption 2.5 0.9 -0.2 0.3 0.9 1.1

Exports of goods and services -12.9 9.1 4.9 6.2 6.7 6.0

Imports of goods and services -11.6 9.3 4.2 5.7 6.4 6.0

Consumer prices 0.3 1.5 1.6 1.6 1.8 1.8

Unemployment rate (level) 9.4 10.0 10.3 10.2 9.9 9.4

Current balance (% of GDP) -0.8 -0.3 -0.2 0.0 0.1 0.2

Government budget (% of GDP) -6.3 -6.3 -5.1 -4.1 -3.2 -2.6

Government debt (% of GDP) 78.8 81.8 85.5 87.5 88.2 88.2

ECB main refi nancing rate (%) 1.1 1.0 1.3 2.6 3.1 3.5

Euro effective exchange rate (1995 = 100) 129.7 118.7 107.6 108.0 109.7 111.2

Euro/US dollar exchange rate ($ per €) 1.39 1.30 1.13 1.11 1.13 1.16

Source: Oxford Economics

% quarter

-2.0 -1.6 -1.2 -0.8 -0.4 0.0 0.4 0.8 1.2 1.6 2.0 2.4

Greece

Spain

Portugal

Italy

Cyprus

France

Belgium

Netherlands

Eurozone

Slovenia

Slovakia

Austria

Finland

Germany

Figure 1

Eurozone GDP growth in Q2 2010

Source: Oxford Economics, Haver Analytics


Post stress tests banking sector still fragile …Looking forward, however, even a robust German economy is unlikely to shield the Eurozone from the strong headwinds it now faces. As a result, we expect growth to fall back sharply in the second half of 2010 and remain weak on a prolonged basis.

For one thing, the banking sector remains a source of concern. The European stress tests published on 23 July suggest that

the banking sector is in better shape than had been feared. Only a small number of banks failed and the amount of additional capital that European banks were required to raise was relatively small. The publication of the tests therefore initially managed to stabilize fi nancial markets.

But, other worrying signals about the underlying health of the banking sector — especially in the "peripheral" countries — come from data on capital fl ows and ECB lending. In the fi rst quarter, Bank of International Settlements fi gures show that European banks cut their exposures to Spain, Portugal, Ireland and Greece by US$130 billion — with the biggest outfl ow being from Spain. This drain of funds is likely to have accelerated yet further in Q2, when concerns about a possible Greek default and the health of Spanish banks were at their height.

The withdrawal of foreign credit lines will have increased the pressure on banks in the affected countries, which are already struggling with signifi cant increases in bad debts due to the depth of the recession. As a result, these banks have increasingly been turning to the ECB for funding. In Q2, ECB loans to banks in Spain, Portugal, Ireland and Greece rose by €110 billion to €355 billion, with the biggest rise being in Spain. ECB lending crept up further in July and August, especially to Portugal. The high level of dependence these countries’ banking sectors have on the ECB suggests there is still a long way to go to restore normal functioning in the fi nancial system. The ECB is funding over 15% of Greek bank assets, 5%—7% of Portuguese and Irish bank assets and 4% of Spanish bank assets.

% exports to Germany, 2009

GDP growth in Q2

Austria

Slovakia

Slovenia

Cyprus

Italy

Netherlands

Portugal

Spain

France

Belgium

8

12

16

20

24

28

32

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4

Figure 2

Growth powered by Germany

Source: Oxford Economics, Haver AnalyticsNote: In Greece, GDP growth was -1.8% and the share of exports to Germany was 11.1% in 2009.

Quarterly change, US$ b Ireland

Portugal

Spain

Greece

-300

-250

-200

-150

-100

-50

0

50

100

150

200

250

Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09

Figure 3

European bank exposures to “peripherals”

Source: BIS

€ b

IrelandPortugalSpainGreece

2007 2008 2009 2010

0

50

100

150

200

250

300

350

400

Figure 4

ECB lending to “periphery”




Banking sector problems are not confi ned to the “peripheral” states. Eurozone banks have been tightening credit standards further, partly due to their own diffi culties in accessing funds and partly due to ongoing uncertainty about the outlook. These diffi culties are refl ected in weak loan growth: in the yearto July, loans to non-fi nancial corporations were up only 1.5% compared with a year earlier.

So, while a collapse of a major Eurozone bank is not foreseen in the near future, tight credit is likely to weigh on growth for some time. In particular, it is likely to cripple the recovery in business investment in the Eurozone as bank loans remain an essential source of funds for companies.

… and fi scal pain only beginning … The swing from expansionary to contractionary fi scal policy is creating a further headwind to growth. Governments are proceeding with the implementation of spending cuts and, in some cases, tax increases. Fiscal retrenchment in the fi rst half of the year was limited. The full effect of the measures will only start signifi cantly denting growth in the second half of this year and then further in 2011. The impact of fi scal tightening measures is estimated to amount to around 1% of Eurozone GDP next year, after neutral fi scal policy this year and a boost of about 1% of GDP in 2009.

The extent to which governments will be able to deliver on their fi scal plans is still unclear. For the most troubled peripheral economies, government bond yields have risen again in recent weeks, close to their early May highs, and markets remain volatile.

In contrast, stronger-than-expected growth in the “core” Eurozone countries in Q2 has lifted tax revenues more than earlier envisaged. However, this tax revenue windfall is generally being used to reduce defi cits faster rather than to justify more modest spending cuts. As such, it only emphasizes the difference in the fi scal positions of the core and peripheral economies.

Fiscal retrenchment across the Eurozone is being focused on spending cuts, both in public current spending and investment. In our forecast, government consumption and investment will cut GDP growth next year, compared with a contribution of 0.5 percentage points (ppt) per annum on average over the last 10 years. Beyond next year, government spending should start growing but probably much more slowly than has been the case in the past. One way in which these cuts will affect the economy is through a marked squeeze on public sector jobs. While public sector employment in the Eurozone has risen steadily by 1% per annum over the last 10 years — thereby adding around 500,000 new jobs every year — many governments both in peripheral and core countries have announced payroll freezes or even cuts.

% point balance

ECB Bank Lending Survey

Next 3 months

Past 3 monthsTighter standards

-80

-60

-40

-20

0

20

40

60

80

100

2003 2004 2005 2006 2007 2008 2009 2010

Figure 5

Banks still tightening credit


0

2

4

6

8

10

12

14

Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10

%

Spain

Greece

Portugal

Ireland

Figure 6

Bond yields



… while default or EMU break-up still a risk Our baseline forecast assumes that fi nancial tensions do not escalate from current levels. But while the dire scenarios of sovereign debt default or even an EMU break-up seem more remote than in May, such developments remain possible within the next few years. Box 1 explores possible scenarios ranging from an orderly default by one country to break-up of the Eurozone. Depending on how it is managed, default by one country could lead to the contagion spreading to other countries. In the case of a sovereign debt default, the negative effects on Eurozone growth would be much larger. A break-up of the EMU would be by far the most negative scenario, at least in the short to medium term.

Forecast

% point contribution to annual GDP growth

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

Figure 7

Government spending impact on growth


From orderly default to EMU break-up — possible scenariosBox 1

Our baseline forecast is, in many ways, a best case scenario that assumes no signifi cant escalation in fi nancial tensions. The EMU would “muddle through” in its current form without going through a renewed fi nancial crisis. We estimate that the probability of this scenario happening is 50%.

Default would occur if the fi scal adjustment proved too painful to sustain. Depending on how it is managed, default by one country could lead to the contagion spreading to other countries. In the event of a default case, the negative effects on Eurozone growth would be much larger. Our baseline forecast therefore represents a best case scenario for the fi nancial environment. In the next best case scenario, default in one country — Greece is still the most likely country to default — is contained via organized discussions with its lenders and EU, ECB and IMF support to other countries in order to avoid contagion. Even in this “ideal” default scenario, some tensions

would emerge, however, pushing risk premia up and denting business confi dence. This would lead to lower Eurozone growth than in the baseline forecast for the fi rst couple of years.

An orderly default would be diffi cult to achieve. It would require Greece to achieve signifi cant progress in fi scal restructuring which, even if it were not enough to make public fi nances sustainable, it would give creditors enough faith in the Greek Government’s ability to put public fi nances on a sustainable path once debt is restructured and encourage the EU governments, the ECB and the IMF to act quickly and decisively to shore up other countries. On this basis, if Greece were to default, the risk of contagion would be high. Contagion, and, in particular, the fi nancial panic and risk aversion that it would ensue, would imply a much higher and longer-lasting cost to Eurozone growth. We estimate the probability of an orderly default scenario is around 25%, while we

put the probability of a disorderly default path at around 15%.

In turn, a disorderly default would increase the risk of a break-up of EMU. This would be, by far, the most negative scenario in the short to medium term. A break-up could occur if a “core” group (comprising, perhaps, France, the Benelux countries and a few other smaller states) no longer wishing to be fi scally responsible for the weaker countries and not wanting the euro's reputation damaged by containing defaulting countries, decided to create a narrower monetary union. Meanwhile, the defaulting countries, tired of fi scal austerity and facing massive problems in their banking sectors and with fi nancing budget defi cits, could decide to create new national currencies which are then devalued sharply in an attempt to boost growth. EMU breakdown is the least likely scenario and we estimate that the probability is around 5%.



VAT hikes to replace oil prices as source of infl ation Infl ation is also causing Eurozone growth to slow down. Eurozone infl ation has risen on the headline Consumer Price Index (CPI) from -0.7% July 2010 to 1.6% in August this year. The increase is primarily due to higher commodity prices and the weakness of the euro. But core infl ation has remained sticky at around 0.8%–1%, higher than would have been expected, given the weakness of demand and the labor market over the last couple of years. Based on past relationships, core infl ation should have fallen to close to zero.

Commodity prices are not expected to increase much from current levels (see Box 2). But, over the coming year, infl ation will be kept high by VAT rate increases in several countries. We expect infl ation for non-energy prices to rise to around 1.3% by Q2 next year, offsetting a forecast fall in energy price infl ation. So, while weak demand and excess capacity mean that companies will have little pricing power, households will continue to see their real incomes eroded by infl ation.

Demand for exports set to weaken …Moreover, while the international environment provided one bright spot to the Eurozone outlook in our two previous reports, this has now started to darken too. Box 2 provides some detailed background on our forecast for the global economy. We estimate that demand

for Eurozone exports was up by more than 15% in the year to Q2 2010. But the rate of growth is forecast to slow to under 10% by the end of the year and to 7%-8% next year.

This points to a slowdown in exports from double-digit growth in Q2, to around 4%–5% next year. In 2012–14, export growth is forecast at around 6% per annum, a similar pace of increase to the fi ve years before the crisis.

… but businesses are still reluctant to step up investment … As exports slow, the question is then whether the strengthening on the domestic side is secure enough to support a meaningful recovery. Domestic demand was robust in Q2 2010, with increases in consumption and investment in a number of countries. But that followed sharp falls during the recession and seems unlikely to mark the start of a renewed domestic demand boom in the Eurozone.

Starting with investment, indications are that companies remain very cautious. For instance, the gap between manufacturing companies’ assessment of production in the next few months (as reported in the Eurostat survey) and what they observed in the last few months has become negative again, implying that businesses do not believe that the recent pace of increase will be maintained.

% year % potential GDP

Forecast

Ex energyin ation (LHS)

Output gap lagged four quarters(RHS)

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

0.0

0.4

0.8

1.2

1.6

2.0

2.4

2.8

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Figure 8

Sticky infl ation


% point difference

Differencebetween forwardlooking and past

Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10

-4

0

4

8

12

16

20

24

Figure 9

Businesses doubt pace of growth will be maintained



Moreover, the ECB Bank Lending Survey shows that a majority of banks are still reporting falling demand for loans and that many of these loans are for debt restructuring purposes rather than investment. Businesses’ priority continues to be to improve their balance sheets and fi nancial position rather than to extend production capacity.

A relatively slow pace of expansion in investment is also likely given the still relatively low level of capacity utilization across the Eurozone (and, indeed, globally). Although capacity utilization rates in the manufacturing sector have risen for the last three quarters, at 75.5% they are still well below the historical average of around 81.5%. Before this crisis, capacity utilization rates had never fallen below 80%. And, as mentioned earlier, even those companies that are seeking to invest are likely to face tough credit standards from banks, which will limit access to funds.

Overall, therefore, we continue to forecast a very weak outlook for Eurozone investment. It is expected to be about 1% below last year’s level on average this year and to grow by less than 2% next year. In 2012–14, investment is forecast to average 2.8% per year, and it is not likely to be until after 2015 that business investment returns to its pre-recession level.

% point balance

Loans for debtrestructuring

Loans forinvestment

Lowers demandfor loans

-80

-60

-40

-20

0

20

40

60

2003 2004 2005 2006 2007 2008 2009 2010

Figure 12

Debt restructuring still a priority


Q1 2008 = 100

Forecast

80

85

90

95

100

105

2008 2009 2010 2011 2012

GDP

Non-residential business investment

Figure 14

Very slow recovery in investment


% point % year

Capacity utilization(LHS)

Non-residential investment(RHS)

65

70

75

80

85

90

-20

-15

-10

-5

0

5

10

15

1995 1997 1999 2001 2003 2005 2007 2009

Figure 13

Low capacity discourages new investment




Forecast assumptions: international environment and commodity pricesBox 2

The forecast for the Eurozone is conditional on a number of assumptions about the international environment, regarding world GDP and trade, commodity prices and exchange rates. Here we look more closely at these assumptions.

Demand for Eurozone exports has been very strong in recent quarters. We estimate that in Q2 2010, exports were more than 15% higher than one year earlier, although still around 6%–7% below the pre-crisis peak.

While foreign demand is expected to continue to grow, the pace of expansion is likely to slow from recent levels. First, US

data has been mixed lately, raising doubts about the strength of economic activity in the next few quarters. We have revised down our forecast for GDP growth this year and next to 2.7% and 2.6%, respectively.

In Asia, some slowdown is expected too, albeit from much higher levels. Chinese GDP growth was in double digits in the fi rst half of the year. We forecast this to fall to around 9% in the second half of the year and next as monetary tightening impinges on growth.

At the global level, world GDP growth is forecast at 3.5% this year (at market exchange rates) and by around 3.4% in 2011 and around 4% per annum in

2011–14. World trade is forecast to increase by around 13% this year and 7%–8% in 2011–14.

Commodity prices have been volatile in recent months. In particular, oil prices rose very quickly in July, to a peak above US$80 per barrel in early August, only to fall back down towards US$75 per barrel in the fi rst couple of weeks of September. We forecast oil prices to be more or less fl at until the end of the year, increasing slightly in ubsequent years.

Figure 10

World: GDP growth

% year

Forecast

1999 2001 2003 2005 2007 2009 2011 2013

-4

-3

-2

-1

0

1

2

3

4

5

6


Figure 11

Oil price, nominal

0

20

40

60

80

100

120

140

1999 2001 2003 2005 2007 2009 2011 2013

Forecast

US$ pb



… or to raise recruitment levels … especially in the SouthCompanies’ caution on investment is refl ected in their attitude to recruitment too. We have constructed an indicator of employment intentions based on surveys across the different sectors of the economy. While employment expectations are less negative than they were a year ago, they remain lower than their troughs in previous recessions.

Labor market conditions and prospects do, however, differ markedly between the North and the South of the Eurozone. The employment intentions indicator has improved markedly in the North, and especially in Germany. This is also refl ected in trends in unemployment rate. To take two extreme examples, the German unemployment rate has been falling over the last year, to 6.9% in July, whereas the Spanish unemployment rate keeps rising, at 20.3% on the latest reading.

We expect businesses to remain cautious in their recruitment decisions. Indeed, in many parts of the Eurozone, productivity remains below pre-crisis levels, which suggests that there is some room to increase activity with only limited rises in staff numbers. This is what one typically sees during recoveries as companies attempt to restore profi tability. We forecast Eurozone employment to fall by 0.5% in 2010 as a whole and to be broadly unchanged

next year. Despite a weaker employment outlook now in the US than at the time of our last report, we still expect 8.5 million more jobs to be created in the US over 2010–14 than in the Eurozone. Eurozone unemployment is still expected to continue rising until mid–2011, peaking at more than 16.3 million.

% point of standard deviation % year

Employment(RHS)

Employmentintentions indicator(LHS)

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

-3

-2

-1

0

1

2

3

1995 1997 1999 2001 2003 2005 2007 2009

Figure 15

Employment intentions still low


-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0


% point of standard deviation

South

North

Figure 16

Employment intentions: North vs. South


120

125

130

135

140

145

150

155

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Millions

US

Forecast

Eurozone

Figure 17

Total employment




… encouraging households to keep savings highSluggish labor markets continue to undermine employees’ bargaining power and put a lid on wage increases. Together with wage cuts in the public sector in many countries, this points to low household income growth. And combined with uncertainty about the impact of the defi cit-cutting measures, this points to continued high precautionary saving and feeble consumer spending.

Consumption is expected to be particularly weak in the South where unemployment is higher, public sector wages and employment cuts are greatest, and VAT hikes are concentrated.

Divergence yet starkerThe outlook is for a prolonged period of weak growth in the Eurozone as a whole. But, as highlighted in the previous two reports, activity will not be uniformly weak. The South will signifi cantly lag behind the North of the Eurozone as it embarks on painful fi scal restructuring and attempts to regain competitiveness. Box 3 presents the update of our divergence indicator that shows even starker divergence than in the previous two reports.

ECB’s balancing actIn this environment, the ECB will continue to face a diffi cult task in balancing its desire to normalize monetary policy as quickly as possible with the risk of hampering a very fragile recovery.

In the absence of infl ationary pressures, we expect that the ECB will leave interest rates unchanged until mid–2011. The ECB’s latest statements have supported this view. First, it has cautioned from concluding that the recovery is now well established following strong Q2 data. Second, on 2 September, the ECB announced that full allotment would be maintained at liquidity operations until at least January 2011. This means that banks can obtain as much liquidity as they need at the prevailing policy rate, currently 1%. This is particularly important for banks in the “peripheral” countries that fi nd it diffi cult to access other market-based sources of funds.

However, in the past, some ECB board members have expressed unease with the current policy stance and have hinted at their desire to normalize monetary policy in the not-too-distant future. We applied the ECB model to look at the impact of an earlier tightening of policy than we currently envisage. According to the ECB’s model, bringing forward the cycle of rate increases by two quarters would reduce Eurozone GDP by 0.5%–1%.

2000 2002 2004 2006 2008 2010 2012 2014

GDP and personal consumption, Q1 2008 = 100

GDP, South**

Consumption, North*

GDP, North*

Consumption, South**

* North = Germany, France, Netherlands, Belgium

** South= Spain, Greece, Portugal, Ireland90

92

94

96

98

100

102

104

106

108

Figure 18

No consumption growth in the South


0

1

2

3

4

5

2008 2009 2010 2011 2012 2013 2014

%

Previous cycle

Q1 2003

Q3 2005

Current cycledebt (RHS)

Figure 19

ECB main refi nancing rate



Convergence and divergence within the EurozoneBox 3

We have updated our indicator of “convergence” within the Eurozone. The indicator looks at a broad range of measures in order to capture the many aspects of convergence. In particular, we look at both convergence in the "level" of economic performance and in economic cycles. And, within each aspect, we look at several variables, including incomes (GDP per capita), prices, fi scal positions and labor markets. We then measure convergence/

divergence by examining the cross-country standard deviations in these variables.

The results are shown in the chart below. The further divergence that was already expected in the previous two reports is now likely to be even more marked. The broad pattern remains the same as in our previous report; but the trends are more marked. Countries with relatively low income levels are expected to grow more slowly than

average so that the income gap across the Eurozone is forecast to widen back to the level of the early 1990s. Cyclical developments are expected to become more similar across countries, largely because former outperformers in the South are now expected to experience only muted growth, if any.

Figure 20

Convergence within the Europe

98.0

98.5

99.0

99.5

100.0

100.5

101.0

101.5

1999 2001 2003 2005 2007 2009 2011

1999 = 100

Convergence indicator

Level component

Cycle component

Increased convergence

Forecast


Figure 21

Income gap widens

60 70 80 90 100 110 120 130 140

Greece

Ireland

Portugal

Spain

Germany

France

Netherlands

Belgium

2007

2012

GDP per capita Eurozone = 100


ConclusionOverall, despite the stronger-than-expected outcome for Q2, our growth forecast is broadly unchanged from the one we presented three (and also six) months ago. The average growth for 2010 has been revised up to 1.5% to take into account the Q2 data. But growth is expected to decelerate from the second half of the year as domestic demand is still too fragile to compensate for a slowdown in exports.

But downside risks to our forecast have increased, especially as the international environment has turned less favorable.


Germany

• German GDP surged in Q2, up by 2.2% in the quarter, the largest quarterly increase since reunifi cation. Strong exports and investment mainly accounted for this result, although private consumption was also up. This has turned Germany into the power engine of the Eurozone.

• We forecast a marked slowdown from the second half of the year. The main factor accounting for weaker growth is the deceleration in world trade that has been so instrumental to the German recovery so far. Although

the Q2 data is encouraging, the domestic economy is not yet robust enough to keep overall GDP growth up as exports slow.

• While, in general, the balance of risk to our Eurozone forecast is on the downside, risks to our forecast for Germany are skewed to the upside.

Forecast Euro b

-4

-3

-2

-1

0

1

2

2005 2006 2007 2008 2009 2010 2011

Figure 22

GDP

Source: Oxford Economics Source: Oxford Economics, Haver Analytics

Forecast

% year

-25

-20

-15

-10

-5

0

5

10

15

20

25

1992 1996 2000 2004 2008 2012

Exports of good and services

World trade index

Figure 23

Exports and world trade

Forecast for Eurozone countries

Table 2

Germany (annual percentage changes unless specifi ed)

2009 2010 2011 2012 2013 2014

GDP -4.7 3.1 1.8 1.7 2.0 2.1

Private consumption -0.1 -0.1 1.1 1.1 1.3 1.4

Fixed investment -10.0 4.7 3.1 3.0 3.6 3.6

Stockbuilding (% of GDP) -1.3 -0.6 -0.2 0.0 0.5 0.9

Government consumption 2.9 2.9 0.4 0.3 0.4 0.6



Consumer prices 0.2 1.1 1.4 1.5 1.6 1.7


Current balance (% of GDP) 5.0 5.0 4.3 4.1 4.0 4.0





France

• Comparing the current episode with previous recoveries, the current upturn is somewhat slower, despite the downturn having been much sharper.

• The main cause of a relatively sluggish upturn is investment. Both demand and supply factors account for the sluggishness of investment including excess capacity, businesses’ assessment that the peak is behind us, a focus on debt restructuring rather than investment and relatively tight credit conditions. Companies seem similarly cautious in their recruitment decisions, although, as far as households

are concerned, sluggish employment has been partly offset by resilient incomes per head.

• Looking forward, these factors are likely to stay in place, pointing to weak domestic demand in the near future. That leaves exports to drive the recovery. But while exports have risen strongly so far, the international environment is now clouding over. Overall, GDP growth is forecast to weaken somewhat from the Q2 levels, to average at 1.5% in 2010 and 1.6% next year.

Figure 24

Recoveries compared

Source: Oxford Economics Source: Oxford Economics

400

450

500

550

600

650

700

750

Thousands Thousands

Forecast

24,000

24,500

25,000

25,500

26,000

26,500

Total (LHS)

Temporary (RHS)

2000 2002 2004 2006 2008 2010 2012 2014

100 = Trough

Forecast

2008-10

Early 1970s

Early 1990s

Early 1980s

Q-5 Q-4 Q-3 Q-2 Q-1 Q0 Q1 Q2 Q3 Q4 Q5

98

99

100

101

102

103

104

105

Figure 25

Employment

Table 3

France (annual percentage changes unless specifi ed)

2009 2010 2011 2012 2013 2014

GDP -2.5 1.5 1.6 2.0 2.1 2.0

Private consumption 0.6 1.4 1.1 1.5 1.7 1.8


Stockbuilding (% of GDP) -1.2 -0.7 -0.2 0.1 0.4 0.6




Consumer prices 0.1 1.7 1.7 1.8 1.9 1.9


Current balance (% of GDP) -2.0 -2.4 -3.4 -3.5 -3.5 -3.4






Italy

• The healthy demand stemming from Asia helped a rebound of the manufacturing sector but, all in all, is not benefi ting the whole economy much. In Q2, GDP grew by just 0.5%.

• Growth is expected to moderate in the fi nal part of the year, with the economy expected to grow by only 0.9% this year and by around 1% in 2011. The expected slowdown in foreign demand will not be compensated by the domestic sector, as the still fragile fi nancial situation of businesses will hamper investment and consumption will be dampened by

persistently high unemployment levels. The unemployment rate has been stable lately at 8.5%, but the recourse to wage supplementation schemes has increased noticeably during the summer suggesting that fi rms are still attempting to cut wage costs.

• Slower-than-expected growth will stand in the way of fi scal consolidation, making it diffi cult for the Government to reduce the defi cit to below 3% of GDP by 2012, and additional measures might be required before the end of the year.

Forecast

-6

-4

-2

0

2

4

6

% year

1980 1984 1988 1992 1996 2000 2004 2008 2012

Domesticdemand

GDP

Net exports

Figure 26

Contributions to GDP growth


% of GDP

Government debt(RHS)

% of GDP

Forecast -8

-7

-6

-5

-4

-3

-2

-1

0 80

85

90

95

100

105

110

115

120

125

130 1997 1999 2001 2003 2005 2007 2009 2011 2013

Governmentde c t ( HS)

Figure 27

Government defi cit and debt


Table 4

Italy (annual percentage changes unless specifi ed)

2009 2010 2011 2012 2013 2014

GDP -5.1 0.9 1.0 1.2 1.4 1.5



Stockbuilding (% of GDP) 0.0 0.3 0.6 0.7 0.1 -0.3

Government consumption 0.6 -0.4 -1.2 0.1 1.0 1.0



Consumer prices 0.8 1.6 1.7 2.0 2.1 2.1







Spain

• At 0.2%, GDP growth in Spain in Q2 2010 was the lowest among the largest Eurozone countries. The external sector provided only a marginal contribution given that the Spanish manufacturing sector exports little to the fast growing countries outside the Eurozone. The pick-up in domestic demand was entirely due to temporary factors such as households bringing expenditure forward before the July VAT increase.

• The fi nal part of the year will see economic activity remain extremely weak. In 2010 as a whole, GDP is set to contract

by 0.5%. Moreover, fi scal consolidation will affect heavily domestic demand in 2011, limiting GDP growth to 0.4%.

• Very slow growth will complicate the accomplishment of the ambitious fi scal consolidation plan aimed at bringing defi cit back to 6% of GDP next year. The budget that will be presented by the end of the month will contain further adjustments, but their full implementation appears very uncertain given the very small majority that the Government enjoys in Parliament.

% of GDP

Government budget balance(LHS)

Government debt(RHS)

% of GDP

Forecast

-12

-10

-8

-6

-4

-2

0

2

4

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

0

10

20

30

40

50

60

70

80

Figure 28

Government balance and debt


-25

-20

-15

-10

-5

0

5

10

% year

1980 1984 1988 1992 1996 2000 2004 2008 2012

GDP

Industrialproduction

Forecast

Figure 29

GDP and industrial production


Table 5

Spain (annual percentage changes unless specifi ed)

2009 2010 2011 2012 2013 2014

GDP -3.7 -0.5 0.4 0.9 1.5 1.9


Fixed investment -16.0 -6.8 -1.9 -0.1 1.3 2.3

Stockbuilding (% of GDP) 0.4 0.4 0.4 0.8 1.2 1.1

Government consumption 3.2 0.3 -2.2 -0.7 1.2 2.5



Consumer prices -0.2 1.7 1.5 1.2 1.3 1.4








Netherlands

• The Netherlands has enjoyed a robust recovery to date, boosted by an aggressive swing in the stock cycle. With the boost from stocks likely to disappear, domestic demand remaining fragile and exports set to cool as the global economy decelerates, the pace of recovery will slow down in the second half of the year. However, the strength of H1 2010 has led us to revise up our forecast for GDP in 2010 to 1.9%; our forecast for 2011 is unchanged at 2.0%.

• The Dutch economy looks to be on a fi rmer footing than most other Eurozone countries. Its low level of government

debt implies a less onerous fi scal retrenchment in the years ahead, while its banking sector performed well in the EU stress tests.

• Infl ation rose sharply in July, but this was due to base effects and the bi-annual rise in gas and electricity prices. Underlying price pressures remain weak.

• So far, markets have taken a sanguine view about the fact that coalition talks remain unresolved, but could lose patience if they continue to drag on.

Figure 30



Figure 31

Prices and earnings


1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

% year

GDP

Net exports

Domesticdemand

-6

-4

-2

0

2

4

6 Forecast

Producerprices

% year

Consumer prices

Forecast

Averageearnings

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

14

Table 6

Netherlands (annual percentage changes unless specifi ed)

2009 2010 2011 2012 2013 2014

GDP -3.9 1.9 2.0 2.4 2.6 2.3







Consumer prices 1.0 1.1 1.6 1.7 2.0 2.0







Belgium

• Following the unexpectedly strong performance for the second quarter, we have raised our forecast for GDP growth this year to 1.8% (previously 1.4%).

• Although fi scal consolidation measures, a weak labor market and slower-than-expected growth in the wider Eurozone region are likely to weigh on Belgium’s economic fortunes in the second half of 2010, the economy now appears to have gained suffi cient momentum to carry it through this period.

• Looking forward to 2011, we expect only a moderate acceleration of economic activity over the course of the year, with GDP growth stable at 1.8% on average.

• Belgium remains in a state of political paralysis, making it impossible to introduce the measures required to place the public fi nances on a sustainable long-term path. The longer it takes for a coalition government to form, the greater the risk that investor sentiment will shift, making debt refi nancing more diffi cult and costly.

-4

-3

-2

-1

0

1

2

3

4

5

6

1981 1985 1989 1993 1997 2001 2005 2009 2013

% year

GDP

Net exports

Domestic demand

Forecast

1980 1984 1988 1992 1996 2000 2004 2008 2012

% of GDP

Government balance (LHS)

Government debt (RHS)

% of GDP

Forecast

60

70

80

90

100

110

120

130

140

150 -16

-14

-12

-10

-8

-6

-4

-2

0

2

Figure 32

Contributions to GDP growthFigure 33

Government balance and debt


Table 7

Belgium (annual percentage changes unless specifi ed)

2009 2010 2011 2012 2013 2014

GDP -2.7 1.8 1.8 2.4 2.7 2.2



Stockbuilding (% of GDP) 0.5 0.8 0.9 0.4 -0.6 -0.4




Consumer prices 0.0 1.9 1.8 1.9 2.0 1.9








Austria

• After a fl at Q1, Austrian GDP grew by a strong 1.2% in Q2. We forecast GDP at 1.6% this year and 1.7% in 2011. Q2 growth was largely accounted for by increased demand for Austrian exports. This dependency on exports will persist throughout 2010 and 2011. But as the global economy slows down — and with it demand for Austrian exports — so will Austrian GDP.

• GDP growth also benefi ted from weak, but positive growth in domestic demand, notably in investment. But as the outlook for the global economy clouds over, Austrian companies are likely to remain cautious in their investment decisions.

• Higher spending and lower revenue will leave the Government with a budget defi cit of 5% of GDP this year. Government fi nances are relatively sound compared with some of the other Eurozone countries, but could be strained if the Austrian banking sector, to Eastern Europe, were to be impacted and require government assistance.

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

% year

Forecast GDP

Net exports

Domestic demand

-5

-4

-3

-2

-1

0

1

2

3

4

5

Figure 34

Contributions to GDP


1980 1984 1988 1992 1996 2000 2004 2008 2012

% year

Investment

Consumption

Forecast

-12

-9

-6

-3

0

3

6

9

12

Figure 35

Consumption and investment


Table 8

Austria (annual percentage changes unless specifi ed)

2009 2010 2011 2012 2013 2014

GDP -3.8 1.6 1.7 1.9 2.2 2.1

Private consumption 1.1 1.0 1.1 1.4 1.6 1.7






Consumer prices 0.4 1.7 1.9 2.0 1.9 1.9







Greece

• An IMF review in September suggested that the Greek Government has made good progress in meeting the conditions of the program. However, challenges remain. While the central government accounts are on track, the local government and social security accounts have been underperforming.

• Investors remain concerned about the longer-term solvency of Greek government debt. Yields on 10-year government bonds have risen back to their pre-bailout levels.

• Underpinning these fears is the continued rise in the debt-to-GDP ratio. Rising debt levels imply a massive ongoing burden of interest payments, which means that Greece must run large primary surpluses for several years to come.

• Greece faces a long period of falling output. We expect a decline of over 4% this year and more than 3% in 2011.

% year

Unemployment rate(RHS)

GDP (LHS)

%

Forecast

-8

-6

-4

-2

0

2

4

6

8

6

8

10

12

14

16

18

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

2,800

3,000

Index

0

2

4

6

8

10

12

% spread

Jan 09 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 May 10 Aug 10

Athens SEstock index (LHS)

10-year bondspread versusGermany (RHS)

Figure 36

GDP and unemployment rateFigure 37

Bond spread and stock market

Source: Oxford Economics, Haver Analytics Source: Oxford Economics, Haver Analytics

Table 9

Greece (annual percentage changes unless specifi ed)

2009 2010 2011 2012 2013 2014

GDP -2.0 -4.2 -3.3 -0.1 1.3 1.5

Private consumption -1.8 -3.7 -4.8 -0.3 0.9 1.3

Fixed investment -13.9 -16.7 -4.3 1.8 4.3 3.2

Stockbuilding (% of GDP) 1.9 3.2 2.8 0.9 -0.9 -0.2

Government consumption 9.6 -12.8 -7.6 -1.9 -0.5 0.1

Exports of goods and services -18.1 -2.2 6.8 12.1 11.9 5.8

Imports of goods and services -14.1 -10.0 -4.3 2.4 3.9 7.4

Consumer prices 1.3 4.7 1.7 0.8 1.1 1.4








Finland

• The Finnish economy is set to make a speedy recovery. Overall, GDP grew by 1.9% in 2Q 2010, underpinned by a strong rebound in exports and an increase in other components such consumption and investment.

• Finland’s sound economic management prior to the global fi nancial crisis will help to sustain the recovery. With one of the lowest budget defi cits and government debt ratios in the Eurozone, Finland has the luxury of withdrawing its fi scal stimulus gradually.

• Finland’s minimal exposure to toxic assets and capital levels well above the minimum requirement, mean that its banking sector is also fairly resilient.

• The outlook for infl ation, however, remains benign. Excess capacity in the economy coupled with banks’ cautious lending practices means that domestic price pressures will remain weak for some time.

2007 2008 2009 2010 2011 2012

% quarter

Forecast

GDP

Net exports

Final domestic demand

Change in inventories

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

Figure 38

Contributions to quarterly GDP growth


-15

-10

-5

0

5

10

15

20

25 % balance

-6

-4

-2

0

2

4

6

8

10

Three-month average, % year


Consumeron en e

(LHS)

Retail sales volume(RHS)

Figure 39

Consumer confi dence and retail sales

Source: Eurostat, Haver Analytics

Table 10

Finland (annual percentage changes unless specifi ed)

2009 2010 2011 2012 2013 2014

GDP -8.1 2.4 2.5 2.9 3.0 3.0







Consumer prices 1.6 1.7 2.5 1.8 1.6 1.6







Ireland

• Ireland’s quarterly GDP growth in Q1 2010 fi nally entered positive territory. However, GNP, the preferred measure of economic performance in Ireland, was still contracting, implying that Ireland has not yet emerged from its long and severe recession.

• With domestic demand remaining so weak, unemployment edging up again and the export rebound in Q1 a one-off, GDP is expected to fall again in Q2 2010 and throughout the remainder of 2010.

• Standard & Poor’s downgrading of Ireland’s public debt in August, as a result of the estimated (albeit still uncertain) cost of bank bailouts, followed by the subsequent rise in long-term government borrowing spreads, are further signs of the problems still facing the economy and the scale of the legacy “hangover” from Ireland’s debt era. It is against this diffi cult backdrop, with the economy still in recession and facing rising unemployment and cost of living, that the December budget will have to be set.

Spain

Greece

Portugal

Ireland

-8

-10

-6

-4

-2

0

2

4

6

8

10

12

% year

2000 2002 2004 2006 2008 2010 2012 2014

Forecast

0

1

2

3

4

5

6

7 %


Ireland

Germany

Figure 39

GDP growthFigure 40

Long-term government borrowing interest rate

Source: Haver Analytics Source: Haver Analytics

Table 11

Ireland (annual percentage changes unless specifi ed)

2009 2010 2011 2012 2013 2014

GDP -7.6 -0.5 2.4 3.9 3.4 3.8




Government consumption -4.4 -5.0 -2.0 -0.1 0.0 0.0


Imports of goods and services -9.8 -0.8 4.2 5.3 5.1 4.8

Consumer prices -1.7 -0.7 1.6 2.0 2.0 2.0








Portugal

• Portuguese GDP grew 0.3% on the quarter in 2010, which was not as weak as expected. However, with worrying economic trends developing in recent months, we expect GDP to decline for the remainder of this year. Growth would average 0.7% in 2010 before becoming negative again at -0.7% next year.

• The outlook for consumption and investment remains bleak. Austerity measures and increasing unemployment will damage disposable income, thereby lowering consumption. Meanwhile, companies’ unwillingness to

invest coupled with limited availability of credit will take its toll on investment.

• With one of the highest budget defi cits and government debt ratios in the Eurozone, the Portuguese Government has taken drastic measures to restructure its public fi nances. However, spreads on government bond yields versus the German bund suggest that investors remain skeptical about Portugal’s ability to achieve its fi scal targets.

% year

Forecast

GDP

Domestic demand

-4

-2

0

2

4

6

8

10

1990 1994 1998 2002 2006 2010

Net exports

Figure 42



Basis points

-100

-50

0

50

100

150

200

250

300

350

400

1995 1997 1999 2001 2003 2005 2007 2009

Figure 43

Bond spread over bunds

Source: Haver Analytics

Table 12

Portugal (annual percentage changes unless specifi ed)

2009 2010 2011 2012 2013 2014

GDP -2.6 0.7 -0.7 1.1 1.4 1.8

Private consumption -1.0 0.8 -1.7 1.7 0.9 1.2

Fixed investment -11.9 -4.7 -3.8 1.2 2.7 3.2


Government consumption 2.9 3.1 -2.1 -0.8 0.4 1.1


Imports of goods and services -10.9 3.8 -0.2 3.2 3.6 4.1

Consumer prices -0.9 1.0 1.0 1.0 1.9 1.8







Slovakia

• The export-oriented Slovak economy continued to grow steadily in Q2 2010, helped by the stronger-than-expected rebound in some of the larger Eurozone countries. However, growth is likely to slow down in the second half of this year and we now forecast GDP to increase by 4.2% in 2010 as a whole, with net exports being the main driver of growth.

• The solid recovery failed to create new jobs until mid-2010, although industrial production was back to its pre-crisis level, a much faster recovery than in the rest of the Eurozone. Nevertheless, the unemployment rate will

remain one of the highest in the Eurozone this year, with 15% of the Slovak workforce affected. As a result, we expect consumption to be subdued in 2010, recovering gradually in 2011.

• The budget defi cit is heading toward 8% of GDP this year and we expect it to decline to around 6% of GDP next year, as the Government announced it will adopt measures to cut it by 2.5ppt in 2011.

% year, volume

Imports Exports

-30

-20

-10

0

10

20

30

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

% year

Forecast

Eurozone

Slovakia

-6

-4

-2

0

2

4

6

8

10

12

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Figure 44

Exports and importsFigure 45

Real GDP growth

Source: Haver Analytics Source: Oxford Economics

Table 13

Slovakia (annual percentage changes unless specifi ed)

2009 2010 2011 2012 2013 2014

GDP -4.7 4.2 3.2 4.5 5.0 3.9







Consumer prices 1.6 1.1 2.0 2.4 2.5 2.4








Luxembourg

• Financial market uncertainties and fi scal defi cit reduction will restrain GDP growth to around 2%–2.5% this year and next, but gradual acceleration to 3% by 2012 is attainable as the fi nancial sector continues to attract new business from within and outside the Eurozone.

• Infl ation will likely stay above the Eurozone average. Prices have responded to imported input costs and reviving wage pressures. The erosion of industrial cost competitiveness will widen the trade defi cit, even though growing service exports will keep the current account in strong surplus.

• Renewed growth and public spending containment are starting to rein in the fi scal defi cit, but its return to balance now depends on further social security and pension reforms that are not yet on the policy agenda. The persistent gap will help to accelerate growth in 2011, but will remain another factor keeping infl ation above the Eurozone average.

% year

Forecast

-6

-4

-2

0

2

4

6

8

10

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

GDP

Employment

Figure 46

Real GDP and employment


% of GDP

Forecast

Euro b

% of GDP(RHS)

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Euro b(LHS)

-0.8

-0.4

0.0

0.4

0.8

1.2

1.6

-6

-4

-2

0

2

4

6

8

Figure 47

Government budget balance


Table 14

Luxembourg (annual percentage changes unless specifi ed)

2009 2010 2011 2012 2013 2014

GDP -4.1 2.5 2.3 2.9 3.3 3.0







Consumer prices 0.0 2.7 2.2 2.0 2.0 2.0







Slovenia

• Stronger export markets lifted the Q2 growth rate to 2.3%, ending nearly two years of recession, but fl at domestic demand and slower Eurozone growth in H2 will keep expansion subdued this year, despite signs of revival in Balkan export markets. We forecast 1.3% GDP growth in 2010 as a whole.

• Infl ation remains above the Eurozone average, at 2.3% in August, refl ecting sensitivity to import costs and continuing wage pressure despite high unemployment. Rising relative costs mean that, after this year’s export-led industrial boost, the trade balance will deteriorate again.

• The Government will make use of low external debt to maintain an unusually wide fi scal defi cit through 2010–11, reinforcing the stimulus from exports and ensuring continued emergence from recession; but the growth rate will remain subdued compared with the pre-2008 period, forcing some fi scal consolidation from next year.

% year

Forecast

-10

-5

0

5

10

15

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

% of GDP

Forecast

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

-7

-6

-5

-4

-3

-2

-1

0

1

2

Figure 48

Real GDPFigure 49



Table 15

Slovenia (annual percentage changes unless specifi ed)

2009 2010 2011 2012 2013 2014

GDP -8.4 1.3 2.0 2.3 2.4 3.1







Consumer prices 0.8 2.3 2.8 2.7 2.8 2.8


Current balance (% of GDP) -1.5 -0.5 0.1 0.8 1.0 0.6






Cyprus

• The Q1 revival of growth was quickly knocked back by Q2 tourism disruption. A widening external defi cit due to weak Eurozone markets and rising import costs mean that GDP growth in 2010 as a whole will be around zero.

• Slow growth means the fi scal defi cit will widen further this year, despite tax increases, and will continue to remain well above EU norms until 2013. The need for defi cit reduction will keep growth around 2% in 2011, and it will stay below 3% in 2012 as monetary policy tightens.

• The current account defi cit, heading above 10% of GDP in 2010–11, is a further constraint on GDP growth and poses downside risks to the forecast if capital infl ows remain subdued.

• Momentum towards reunifi cation has been lost since April’s change of leader in the breakaway republic, and continued discussions regarding property and port access remain a source of ongoing economic constraint as well as political risk.

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

% year

Forecast

-6

-4

-2

0

2

4

6

8

Eurozone

Cyprus

Figure 50

Real GDP growth


-8

-6

-4

-2

0

2

4

Euro b(LHS)

% of GDP

Forecast

-1.4

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

Euro b

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

% of GDP(RHS)

Figure 51



Table 16

Cyprus (annual percentage changes unless specifi ed)

2009 2010 2011 2012 2013 2014

GDP -1.7 0.5 2.0 2.8 3.8 3.4



Stockbuilding (% of GDP) -2.7 -0.6 -0.1 0.0 0.0 -0.1

Government consumption 5.8 -2.0 1.0 2.1 2.7 3.0

Exports of goods and services -11.8 -1.5 3.0 6.4 5.7 5.3


Consumer prices 0.2 2.4 2.4 2.3 2.2 2.3







Malta

• After a mild 1.9% drop in 2009, Malta continued to recover in early 2010, as exports added to the demand boost from fi scal stimulus. We expect GDP to grow by 2.0%–2.5% this year.

• The slow withdrawal of the fi scal stimulus is likely to keep the budget defi cit above 3% of GDP until 2013. However, Moody’s confi rmation in September of Malta’s A1 sovereign credit rating, with stable outlook, supports the Government’s belief that it is on track to stabilize and reduce public debt.

• Consumer price infl ation picked up to 2.5% in July, and double-digit producer infl ation confi rmed signifi cant underlying pressures. We forecast infl ation to rise further in 2011, remaining above the Eurozone average.

• Financial services expansion could contribute positively to growth in the next few years as new EU rules move Malta further onto the map for specialist investment funds and other fi nancial products aimed at higher-end investors.

-10

-8

-6

-4

-2

0

2

4

6

8

10

2003 2005 2007 2009 2011 2013

% year

Forecast

Net exports

Domestic demand

-10

-8

-6

-4

-2

0

2

2003 2005 2007 2009 2011 2013

% GDP

Forecast

Malta

Eurozone

Figure 52

Contributions to GDPFigure 53

Fiscal balance versus Eurozone


Table 17

Malta (annual percentage changes unless specifi ed)

2009 2010 2011 2012 2013 2014

GDP -1.9 2.3 2.1 2.8 3.0 3.0




Government consumption -2.4 -6.1 0.3 1.1 3.0 3.0



Consumer prices 1.8 1.9 2.6 2.3 2.3 2.3







Forecast assumptions

2009 2010 2011 2012 2013 2014

Short-term interest rates (%) 1.2 0.8 1.4 2.7 3.2 3.6

Long-term interest rates (%) 3.8 3.6 3.8 4.5 5.0 4.9


Oil prices (€/barrel) 44.2 59.8 71.2 76.6 80.2 81.4

Share prices (% year) -17.3 4.6 4.1 8.4 8.7 8.7

2009 2010

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Short-term interest rates (%) 2.0 1.3 0.9 0.7 0.7 0.7 0.8 1.1

Long-term interest rates (%) 3.9 4.0 3.8 3.7 3.7 3.6 3.5 3.6

Euro effective exchange rate (1995 = 100) 128.0 128.9 130.2 131.8 125.8 118.8 117.1 113.3

Oil prices (€/barrel) 34.2 43.2 47.7 50.5 55.2 61.6 60.0 63.1

Share prices (% year) -42.9 -28.4 -5.4 21.2 41.5 7.1 -9.2 -9.9

Detailed tables and charts


Eurozone GDP and components

Annual levels — Real terms(€ billion, 2000 prices)

2009 2010 2011 2012 2013 2014

GDP 7,461 7,572 7,676 7,810 7,967 8,130

Private consumption 4,342 4,366 4,400 4,456 4,522 4,596

Fixed investment 1,494 1,478 1,505 1,544 1,590 1,636

Government consumption 1,606 1,621 1,617 1,622 1,636 1,654

Stockbuilding -40 49 73 86 101 118

Exports of goods and services 3,052 3,329 3,491 3,708 3,955 4,194

Imports of goods and services 2,993 3,271 3,409 3,605 3,837 4,069

Annual levels — Nominal terms(€ billion)

2009 2010 2011 2012 2013 2014

GDP 8,959 9,170 9,438 9,765 10,139 10,533

Private consumption 5,166 5,289 5,418 5,572 5,752 5,949

Fixed investment 1,759 1,759 1,818 1,888 1,969 2,055

Government consumption 1978 2,028 2,066 2,116 2,180 2,251

Stockbuilding -66 -13 36 76 110 138

Exports of goods and services 3,248 3,689 3,926 4,194 4,489 4,780

Imports of goods and services 3,126 3,582 3,826 4,082 4,362 4,640

Quarterly forecast (quarterly percentage changes)

2009 2010

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

GDP -2.5 -0.1 0.4 0.2 0.3 1.0 0.2 0.2

Private consumption -0.5 0.0 -0.1 0.2 0.2 0.5 -0.2 0.1

Fixed investment -5.3 -2.0 -1.1 -1.2 -0.4 1.8 -0.2 0.2

Government consumption 0.7 0.6 0.5 -0.1 0.2 0.5 0.0 0.0

Exports of goods and services -7.9 -1.3 2.8 2.0 2.4 4.4 0.9 0.6

Imports of goods and services -7.3 -2.8 2.6 1.3 4.0 4.4 0.2 0.4

Contributions to GDP growth (percentage point contribution to quarter on quarter GDP growth)

2009 2010

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

GDP -2.5 -0.1 0.4 0.2 0.3 1.0 0.2 0.2

Private consumption -0.3 0.0 -0.1 0.1 0.1 0.3 -0.1 0.1

Fixed investment -1.1 -0.4 -0.2 -0.2 -0.1 0.4 0.0 0.0

Government consumption 0.2 0.1 0.1 0.0 0.1 0.1 0.0 0.0

Stockbuilding -1.0 -0.4 0.5 0.0 0.9 0.2 0.0 -0.1

Exports of goods and services -3.4 -0.5 1.1 0.8 1.0 1.9 0.4 0.3

Imports of goods and services 3.1 1.1 -1.0 -0.5 -1.6 -1.8 -0.1 -0.2



Prices and costs indicators(annual percentage changes unless specifi ed)

2009 2010 2011 2012 2013 2014

HICP headline infl ation 0.3 1.5 1.6 1.6 1.8 1.8

Infl ation ex-energy 1.3 0.9 1.2 1.5 1.7 1.8

GDP defl ator 1.0 0.9 1.5 1.7 1.8 1.8

Import defl ator -1.8 5.4 2.4 2.1 1.8 1.5

Export defl ator -9.3 8.5 4.5 2.0 0.8 0.8

Terms of trade -7.5 3.1 2.1 -0.1 -0.9 -0.8

Earnings 1.6 1.7 1.7 2.3 2.9 3.0

Unit labor costs 3.8 -0.6 0.2 0.9 1.4 1.5

Output gap (% of GDP) -5.4 -4.1 -3.5 -3.0 -2.3 -1.7

Oil prices (€ per barrel) 44.2 59.8 71.2 76.6 80.2 81.4


2009 2010

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

HICP headline infl ation 0.9 0.2 -0.4 0.4 1.1 1.5 1.6 1.7

Infl ation ex-energy 1.7 1.5 1.2 1.0 0.9 0.8 0.9 1.0

GDP defl ator 1.7 1.0 0.8 0.3 0.3 0.7 1.1 1.3

Import defl ator -0.1 -1.4 -2.8 -2.8 3.5 6.2 5.9 6.0

Export defl ator -6.8 -9.6 -13.0 -7.4 4.9 10.5 9.2 9.6

Terms of trade -6.7 -8.2 -10.2 -4.6 1.3 4.4 3.3 3.6

Earnings 2.3 1.3 1.4 1.4 1.8 1.8 1.6 1.4

Unit labor costs 5.9 4.7 3.5 1.3 -0.5 -1.0 -0.6 -0.3

Output gap (% of GDP) -5.2 -5.4 -5.4 -5.8 -4.8 -3.9 -3.9 -3.9

Oil prices (€ per barrel) 34.2 43.2 47.7 50.5 55.2 61.6 60.0 63.1

Euro effective exchange rate (1995 = 100) 128.0 128.9 130.2 131.8 125.8 118.8 117.1 113.3


(annual percentage changes unless specifi ed)Labor market

2009 2010 2011 2012 2013 2014

Employment -1.9 -0.5 -0.1 0.3 0.5 0.6

Unemployment rate (%) 9.4 10.0 10.3 10.2 9.9 9.4

NAIRU (%) 7.9 8.4 8.9 9.0 9.0 8.8

Participation rate (%) 73.2 73.2 73.4 73.7 74.0 74.3

Earnings 1.6 1.7 1.7 2.3 2.9 3.0

Unit labor costs 3.8 -0.6 0.2 0.9 1.4 1.5

2009 2010

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Employment -1.3 -1.9 -2.2 -2.1 -1.3 -0.6 -0.2 -0.1

Unemployment rate (%) 8.8 9.3 9.7 9.8 9.9 10.0 10.0 10.2

NAIRU (%) 7.7 7.8 7.9 8.1 8.2 8.3 8.5 8.7

Participation rate (%) 73.2 73.3 73.1 73.1 73.1 73.3 73.2 73.2

Earnings 2.3 1.3 1.4 1.4 1.8 1.8 1.6 1.4

Unit labor costs 5.9 4.7 3.5 1.3 -0.5 -1.0 -0.6 -0.3



Current account and fi scal balance

Measures of convergence/divergence within the Eurozone

2009 2010 2011 2012 2013 2014

Trade balance (€ b) 15.3 3.1 -12.3 -1.2 20.4 38.0

Trade balance (% GDP) 0.2 0.0 -0.2 0.0 0.3 0.5

Current account balance (€ b) -67.6 -28.3 -21.0 -4.7 15.0 22.9

Current account balance (% GDP) -0.8 -0.3 -0.2 0.0 0.1 0.2

Government budget balance (€ b) -565 -580 -485 -398 -323 -272

Government budget balance (% GDP) -6.3 -6.3 -5.1 -4.1 -3.2 -2.6

Cyclically adjusted surplus (+)/defi cit (-) (% GDP) -4.7 -0.6 1.1 2.7 4.1 5.1

Government debt (€ b) 7,063 7,504 8,069 8,548 8,945 9,285

Government debt (% GDP) 94.7 99.1 105.1 109.4 112.3 114.2

1999–2003 2004–2008 2009–2013

Growth and incomes

Standard deviation of GDP growth rates 1.9 2.2 1.4

Growth rate gap (max−min) 7.2 8.1 5.4

Highest GDP per capita (Eurozone = 100) 231.2 246.8 247.6

Lowest GDP per capita (Eurozone = 100) 27.9 31.8 32.0

Infl ation and prices

Standard deviation of infl ation rates 1.9 2.2 1.4

Infl ation rate gap (max−min) 7.2 8.1 5.4

Highest price level (Eurozone = 100) 115.5 116.6 115.4

Lowest price level (Eurozone = 100) 44.7 59.0 65.4


Cross-country tables

Real GDP(% year)

Rank 2009 2010 2011 2012 2013 2014Average

2010–2014

1 Slovakia -4.7 4.2 3.2 4.5 5.0 3.9 4.2

2 Luxembourg -4.1 2.5 2.3 2.9 3.3 3.0 2.8

3 Finland -8.1 2.4 2.5 2.9 3.0 3.0 2.8

4 Malta -1.9 2.3 2.1 2.8 3.0 3.0 2.6

5 Ireland -7.6 -0.5 2.4 3.9 3.4 3.8 2.6

6 Cyprus -1.7 0.5 2.0 2.8 3.8 3.4 2.5

7 Netherlands -3.9 1.9 2.0 2.4 2.6 2.3 2.3

8 Slovenia -8.4 1.3 2.0 2.3 2.4 3.1 2.2

9 Belgium -2.7 1.8 1.8 2.4 2.7 2.2 2.2

10 Germany -4.7 3.1 1.8 1.7 2.0 2.1 2.2

11 Austria -3.8 1.6 1.7 1.9 2.2 2.1 1.9

12 France -2.5 1.5 1.6 2.0 2.1 2.0 1.9

13 Eurozone -4.0 1.5 1.4 1.7 2.0 2.0 1.7

14 Italy -5.1 0.9 1.0 1.2 1.4 1.5 1.2

15 Portugal -2.6 0.7 -0.7 1.1 1.4 1.8 0.9

16 Spain -3.7 -0.5 0.4 0.9 1.5 1.9 0.8

17 Greece -2.0 -4.2 -3.3 -0.1 1.3 1.5 -1.0

Infl ation rates(% year)

Rank 2009 2010 2011 2012 2013 2014Average

2010–2014

1 Portugal -0.9 1.0 1.0 1.0 1.9 1.8 1.4

2 Ireland -1.7 -0.7 1.6 2.0 2.0 2.0 1.4

3 Spain -0.2 1.7 1.5 1.2 1.3 1.4 1.4

4 Germany 0.2 1.1 1.4 1.5 1.6 1.7 1.5

5 Eurozone 0.3 1.5 1.6 1.6 1.8 1.8 1.7

6 Netherlands 1.0 1.1 1.6 1.7 2.0 2.0 1.7

7 France 0.1 1.7 1.7 1.8 1.9 1.9 1.8

8 Finland 1.6 1.7 2.5 1.8 1.6 1.6 1.8

9 Italy 0.8 1.6 1.7 2.0 2.1 2.1 1.9

10 Austria 0.4 1.7 1.9 2.0 1.9 1.9 1.9

11 Belgium 0.0 1.9 1.8 1.9 2.0 1.9 1.9

12 Greece 1.3 4.7 1.7 0.8 1.1 1.4 1.9

13 Slovakia 1.6 1.1 2.0 2.4 2.5 2.4 2.1

14 Luxembourg 0.0 2.7 2.2 2.0 2.0 2.0 2.2

15 Malta 1.8 1.9 2.6 2.3 2.3 2.3 2.3

16 Cyprus 0.2 2.4 2.4 2.3 2.2 2.3 2.3

17 Slovenia 0.8 2.3 2.8 2.7 2.8 2.8 2.7


Detailed tables and chartsDetailed tables and charts

Unemployment rate(%)

Rank 2009 2010 2011 2012 2013 2014Average

2010–2014

1 Austria 4.8 4.2 4.3 4.1 4.1 4.2 4.2

2 Luxembourg 5.3 4.9 5.1 4.9 4.5 4.0 4.7

3 Netherlands 3.4 4.4 5.0 5.1 4.9 4.8 4.8

4 Cyprus 5.4 6.3 5.8 5.1 4.7 4.6 5.3

5 Slovenia 5.9 7.2 6.5 5.5 5.1 5.1 5.9

6 Malta 7.0 7.0 6.7 6.0 5.6 4.8 6.0

7 Germany 7.5 7.0 6.9 6.9 6.7 6.3 6.8

8 Finland 8.2 8.7 8.4 7.9 7.4 6.9 7.9

9 Italy 7.8 8.5 8.4 8.1 7.7 7.5 8.0

10 Belgium 7.9 8.8 8.8 8.1 7.8 7.7 8.2

11 France 9.4 10.2 10.5 10.1 9.6 8.9 9.9

12 Eurozone 9.4 10.0 10.3 10.2 9.9 9.4 10.0

13 Ireland 11.8 13.1 12.3 11.2 10.6 9.8 11.4

14 Portugal 9.6 11.3 12.2 12.1 12.0 11.6 11.8

15 Slovakia 12.0 14.9 14.4 11.8 10.4 9.5 12.2

16 Greece 9.5 11.8 13.9 14.6 14.6 14.3 13.8

17 Spain 18.0 19.7 20.4 20.6 20.2 19.4 20.1

Public defi cits(% of GDP)

Rank 2009 2010 2011 2012 2013 2014Difference

2010–2014

1 Luxembourg -0.7 -1.6 -1.3 -1.1 -0.9 -0.8 0.0

2 Austria -3.4 -5.1 -4.2 -3.7 -3.3 -3.0 0.4

3 Malta -3.8 -4.0 -3.8 -3.3 -3.0 -2.8 1.0

4 Germany -3.3 -4.6 -4.1 -3.4 -2.7 -2.1 1.2

5 Finland -2.2 -3.8 -2.7 -1.9 -1.1 -0.3 1.9

6 Italy -5.3 -5.1 -4.6 -4.4 -3.6 -2.9 2.4

7 Slovakia -6.8 -7.8 -5.9 -4.5 -3.8 -3.4 3.4

8 Cyprus -6.1 -6.4 -5.0 -3.6 -2.9 -2.5 3.6

9 Slovenia -5.6 -6.2 -4.8 -3.6 -2.5 -2.0 3.6

10 Eurozone -6.3 -6.3 -5.1 -4.1 -3.2 -2.6 3.7

11 France -7.5 -8.3 -6.5 -4.6 -3.6 -3.1 4.4

12 Belgium -6.0 -4.8 -4.0 -3.2 -2.2 -1.2 4.8

13 Netherlands -5.3 -6.4 -5.1 -3.2 -1.4 -0.5 4.8

14 Portugal -9.4 -8.5 -6.7 -5.0 -3.8 -2.9 6.5

15 Spain -11.2 -9.6 -6.9 -5.2 -4.6 -4.4 6.8

16 Ireland -14.6 -11.7 -9.4 -8.4 -7.1 -5.9 8.7

17 Greece -13.6 -8.4 -7.4 -6.5 -4.7 -3.9 9.7

Cross-country tables

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