ING - Eurozone Economic Update

The Eurozone economy is showing signs of stabilisation, but a return to positive growth might have to wait until 2010. Further unfolding of government stimulus, combined with the ECB’s aggressive monetary easing, should help to stabilise the economy further. With the output gap widening further until 2011, there is no need for the ECB to seriously consider an early exit strategy.

Will there be a crisis after the crisis? Regional imbalances have laid the foundations for significant ‘overleveraging’ of several high-growth countries. Household and corporate indebtedness has increased over the past ten years, more than offsetting improved financial and non-financial wealth. Once the dust of the first phase of the recession has settled, the correction of regional imbalances could become the real challenge for the Eurozone economy. We believe adjustment and restructuring will impede the Eurozone’s growth engines of the past ten years. Others will have to take over the driving.

The strength of any recovery depends on labour market developments. Eurozone countries are increasingly confronted with the economic and social impact of rising unemployment. In Germany , the labour market could become the dominant issue for the federal electionsin September. In France , the virtues of the social system are at risk as soaring public deficits are limiting the room for fiscal manoeuvre. At the same time, Italy, Spain and Belgium are experiencing an even more dramatic deterioration of public finances. Meanwhile, in The Netherlands, consumers are being squeezed by wealth effects and job insecurity.