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New Concerns about Europe's Economy

Many international Institutions, in particular the IMF, are concerned with the hard times the European economy could again experience. The question is often raised: Is Europe the sick man of the world? In fact its real GDP growth in 2015 will dip to only 0.8% compared to an initial forecast of 1.1%. Let us focus on the largest economy in the euro zone. Germany is the economic engine of Europe. But the German economy suffers today from a lack of demand and is impacted by the emergence of geopolitical uncertainties such as the conflict between Russia and Ukraine, an increase in terrorism across the world, or the spread of the Ebola Virus. And the country's economy is heavily reliant on exports. Yet, its larger customers include France and Italy, two countries in difficulty. Note that growth rate down by 1% in Germany causes a loss of half a percentage point of growth throughout the euro zone (18 members). This could lead Europe's economy to its further stagnation or even to recession. Add to that the fact that the current low inflation could become a deflation. The economic litterature tells us that deflation may escalate as households delay purchases and as a result, firms become reluctant to invest and expand their production capacities.The IMF but also the G20 are calling on the EU governments to take action and focus on massive investments in infrastructure projects. We are talking about € 300 billion. It is true that Europe's growth potential gradually weakened over the last 6 years. In reply to a question on "secular stagnation" O.Blanchard (IMF) said that : "There are 2 issues. On the slowdown in potential growth, the evidence is yes....On whether we will be able to get back to potential output, increase demand enough to get to potential output, I think we do not know yet". Germany has already informed the European Commission that it would refuse to increase its level of public spending and that the key element was to ensure a balanced budget. But many other European countries have different opinions. It is an understatement to say that the outlook for the European economy is very uncertain.

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