Eurozone: a new global context favors long-term growth.

• Author: Mersch, Yves
• Position: Economy

The economic prospects of Europe and other parts of the world have traditionally hinged on the U.S. economy. Now most economists concur with the view that the U.S. economy is sneezing. Yet this time the rest of the world is not expected to catch a cold. Why not? Why is there so much confidence that the euro area can successfully decouple its economic trajectory from the current U.S. slowdown? Let me lay out some thoughts in this regard in the context provided by recent macroeconomic developments--at the global level, in the U.S. and in Europe.

Let me start with the global macroeconomic environment. The dynamism of the world economy since its rebound in mid-2003 has been exceptional both in the pace of growth and its duration. Cyclical factors, underpinned by favorable financing conditions, have supported this expansion. But, equally so, it is likely that there is also a structural trend favoring a rising path for world growth. For example, the integration of the eastern European economies into the global trading system, followed by China and India, is one such structural factor. The "catch-up" potential of these economies is so large that it is unlikely that trend for growth will revert soon.

This year we are likely to witness a mild drop of global growth to slightly below five percent, according to the In ternational Monetary Fund's (IMF) recent World Economic Outlook report. Despite this moderation of growth, the favorable macroeconomic situation is expected to continue. As overall global growth continues to be rebalanced--away from the U.S. to the euro area and Japan--the risk of a more abrupt global slowdown continues to abate. While the U.S. economy can expect sub-par growth and the euro area will probably ease (from 2.8 percent growth in 2006 to 2.5 percent in 2007), the current expansion in Japan is set to continue at the pace it enjoyed in 2006. Emerging economies, particularly in Asia, seem set to continue robust growth. So the spillover effects of U.S. developments, including a soft landing for the economy, should be contained.

The latest episode in the ongoing correction of the U.S. housing market, notably the bankruptcies of 40 "subprime" (i.e. high risk) mortgage lenders, is, technically speaking, a sign that some lenders failed in their risk appraisals because, in this sector, a significant number of borrowers have defaulted on their loans in a situation where house prices have merely stabilized, not fallen, after a period of exuberant rises. A contained correction in the U.S. housing market is welcome because it prevents a further build-up of the prevalent disequilibrium. In addition, there are benefits...