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ND Expert: EU fiscal summit unsuccessful; countries headed for recession

by Shannon Chapla

December 14, 2011


University of Notre Dame Finance Professor Jeffrey H. Bergstrand, one of the world’s top experts in international trade and the world economy, says the European Union last week agreed on deeper economic integration, but fell short of a convincing plan to fix the region’s debt woes.

“The summit was not a success because they did not address one of the central issues the Eurozone has to face,” Bergstrand explains, “and that is the willingness of the European Central Bank to absorb some of the sovereign debt. The European Central Bank has powers even larger than the Federal Reserve system has in the US economy. They have explicitly said they can buy sovereign debt of countries like Italy, Spain and Greece. They can also buy private liabilities from banks to help solve their banking crisis. This is what the markets have been looking for and was not provided in the summit agreement.”

Bergstrand says although 26 of the 27 EU countries agreed to allow more supervision of their fiscal policies, the lack of clear signals to the market indicates there still is too cautious an attitude toward resolving debt problems, which will have several repercussions.

“Western Europe will not go into a recession, nor will it have a robust recovery,” Bergstrand says. “What we’re likely to see is countries with very high interest rates like Spain, Italy, Greece and Portugal, are headed for recession. Many of the stronger economies, notably Netherlands and Germany, will continue to grow, so we’re going to see in the whole region more divergence in terms of economic activity— recessions in some countries, growth in others and flatness overall.

“As for the US economy, we have stymied any kind of further fiscal spending in order to boost demand in our economy, so we are simply growing at a very sluggish rate, and that’s not going to change in the near term. More importantly, China and India are slowing down, and we’re seeing the impacts all over the world of those slow-downs. The trajectory for the world economy is very sluggish growth for several years going forward.”

Media Advisory: Bergstrand’s comments can be used in whole or in part. He is available for interviews and can be reached at 574-631-6761 or Bergstrand.1@nd.edu.