Euro-Zone News and Analysis
Press summary: Irish economy unexpectedly slipped back into recession at the end of 2011
Data released yesterday showed that the Irish economy unexpectedly slipped back into a recession at the end of 2011, as GDP contracted by 0.2% in the final quarter. Crucially, GNP (which strips out the earnings of large foreign companies) fell by 2.2% in the final quarter of 2011, despite being forecast to grow by 1.5%. Much of the decline was down to lower than expected export growth. Despite the dip, Irish GDP still grew by 0.7% over the course of 2011.
Meanwhile, data released yesterday showed that output growth in Germany slowed in March, economic activity contracted in France and manufacturing across the eurozone fell sharply, all suggesting the eurozone has entered a recession in the first quarter of 2012.
Spanish ten year borrowing costs rose above 5.5% yesterday for the first time since January as markets became increasingly concerned over Spain due to weak eurozone growth. The WSJ reports that mortgage costs in Spain, Italy and Portugal have been rising significantly, heaping further pressure on the struggling economies. The WSJ reports that, ahead of regional elections in Andalusia on Sunday, the governing Partido Popular looks set to win a majority, a result which would be seen as a validation of their austerity policies.
The FT reports, that according to a leaked ‘options note’, the Commission supports merging the EFSF and the ESM, the eurozone’s temporary and permanent bailout funds respectively, to give a combined lending capacity of €940bn. However, the note accepts that the current German preference is to have the funds run in parallel for the next year at which point the EFSF will be wound down as planned. Handelsblatt reports that Merkel is facing a rebellion from some MPs in her governing coalition who are opposed to combining or running the funds in parallel.
In an interview with Handelsblatt, former ECB Executive Board member Jürgen Stark warns of inflation risks from the ECB lending operations, saying, “Historically, we know that any particularly strong expansion of the central bank balance sheet leads to inflation in the medium term.” Stark adds that given the three year timeline on the loans he does not believe that the ECB can easily absorb the excess liquidity.
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