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Eurozone crisis 'far from over'- Ernst and Young

The threat of a Greek default may have been postponed, but financial stress in the eurozone remains high.

The threat of a Greek default may have been postponed, but financial stress in the eurozone remains high.

The threat of a Greek default may have been postponed, but financial stress in the eurozone remains high, with bond spreads in fiscally stretched economies still wide, the euro nose-diving and stock markets still volatile, according to Ernst and Young's latest Eurozone Forecast.

"The crisis is far from over and the repercussions will be felt over several years as the need to restore sound public finances will hit growth, potentially derailing an already lacklustre eurozone economy. We forecast eurozone GDP growth of 0.8 per cent this year, 1.3 per cent in 2011 and 2.1 per cent on average in 2012-14," the report says.

Ernst and Young says after months of "half-hearted statements", the EU governments presented a comprehensive package of measures to address the sovereign debt crisis, "with an impressive headline total of €750 billion".

After the €110 billion EU-IMF Greek package, these measures were aimed primarily at the other eurozone countries most under threat, mainly Spain and Portugal, and more generally at any EU country that could start facing the same kind of financial market pressure and debt financing difficulties.

According to this latest forecast the repercussions of the sovereign debt crisis will lead to growth in the eurozone being 1 to 2.5 percentage points lower than in the US in each of the next five years, and some eurozone economies enduring an extended period of difficult times.

In the period to 2014, growth in eurozone GDP is forecast to be nearly nine per cent lower than US GDP, which amounts to nearly €2,500 per citizen.

The impact on jobs is just as striking. While the US economy will generate more than 10 million new jobs by 2014, employment levels will barely change in the eurozone.

Poor growth prospects are expected to hamper the eurozone's attractiveness as a location for doing business. The forecast points out that surveys of business decision-makers also show that the eurozone risks losing its attractiveness as a region in which to invest.

"We estimate that increasing investment growth in 2011-14 to the same rates that we expect for the US would lift eurozone GDP by 1.5 per cent over a four-year period. This is equivalent to a cumulative gain of around €300 billion in GDP over 2011-14.

"Similarly, employment would be around 600,000 higher than our baseline forecast by 2014. However, to rise to this challenge, investment in new technologies, from IT to green sectors, combined with reforms to labour and product markets, is needed," it says.

Ernst and Young says policy-makers also need to work on the institutional framework of the eurozone. Governments and the European Commission need to address the fundamental flaws that led to the crisis, namely the lack of fiscal policy coordination and overdue structural reforms.

"Moreover, action is needed to tackle the imbalances within the eurozone that are at the root of the current crisis. This means addressing the factors contributing to the bubbles and unsustainable growth that occurred in countries such as Greece, Ireland, Portugal and Spain (the 'South') as well as the causes of anaemic domestic demand in the 'North'. The former implies a need to foster development of new sectors to take up the slack left by collapsed construction and real estate sectors. The latter requires reforms of labour, product and financial markets."

The report highlights that organisations need to achieve sustainable growth to ensure the eurozone recovery continues. With volatility still high across the eurozone, companies are reassessing their growth strategies, looking to innovation, industry consolidation, entrepreneurship and expansion into emerging markets to power their long-term plans.

"However, with capital markets remaining highly volatile, limited access to credit could prevent companies implementing these strategies and, ultimately, could put the recovery of the eurozone at risk."

It says corporate profitability has recently stabilised and should start trending upwards in coming months. However it adds: "This recovery momentum is fragile and companies' investment decisions are already heavily influenced by the growing concerns about fiscal sustainability; which led to renewed instability on financial markets and a loss of confidence in the euro."

The forecast says the business community at large is showing strong support for the euro which it describes as "one of the fundamental pillars of European integration and has brought great benefits to companies and citizens across our continent". Its stability and credibility is of highest importance, it says, and greatly influences the business environment not only in Europe but globally.

"A sense of urgency and priority is critical to the current debate on euro area governance. Surveillance of economic policies will need to be significantly reinforced. The Stability and Growth Pact remains the appropriate instrument to coordinate budgetary policies in the euro area, but it will need to be strengthened, complemented and better enforced," it says.

Ernst and Young says a sense of direction and political leadership is needed, adding that it is essential that the European decision-makers set the right course of action and instil an even greater sense of urgency in the current debate.

"Everyone, business in particular, wants to see the euro area resolve its current difficulties and emerge stronger from the turmoil," it says.

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