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The European economy continues to show weakness.

The European economy continues to show weakness. Dwain Ross ★★★★★

The European economy continues to show weakness.

In the first quarter of 2013, the total GDP of the Eurozone countries fell by 0.2% after a decline of 0.6% in the previous, fourth quarter of last year. While the weak economic performance of the peripheral countries of the bloc in Southern Europe was quite expected, the economic situation in the two largest countries of the Eurozone - France and Germany - is of particular concern. German GDP in the first quarter increased by only 0.1%, and in France, and generally fell by 0.2%. And this is after a similar reduction in the last quarter of 2012. In part, these indicators reflect the weakness of the export sector, which, in turn, is explained by the sharp increase in the euro exchange rate over the past few months.

Despite the weakness exhibited by the Eurozone economy as a whole, Greece, one of the countries most affected by the European credit crisis, has recently been showing some progress. The ongoing changes did not go unnoticed. Thus, the Fitch rating agency reported in May that Greece would increase its credit rating by one notch. According to the agency, the rating was raised due to the improvement of the country's budget balance and the efforts made by the Greek government to reduce the budget deficit.

Evidence of positive changes can be found in a survey on economic sentiment, which is now at the highest level in the last three years. Due to the increase in the rating and the improvement of macroeconomic indicators, the yield of Greek government bonds also fell to the lowest level in the last three years. This indicates that now investors are much less than in the past concerned about the possibility of Greece leaving the Eurozone. However, it should be emphasized that the country's GDP in the first quarter decreased by 5.3%, and unemployment is 27%. These data indicate that the crisis in Greece is still far from over.

Is Europe changing its approach?
High unemployment and ongoing stagnation in the Eurozone countries have forced European leaders to reconsider ways to deal with the ongoing crisis. For three consecutive years, since the beginning of the European debt crisis, European leaders have pursued a policy ofbudget containment,” the goal of which is to reduce the level of debt in various countries.

Recently, the voices of those who criticize this policy and argue that it is harmful are growing louder because it restrains the pace of economic growth in the Eurozone. European governments have not remained indifferent to this criticism. Recently, there has been a definite change in the attitude towards tight fiscal policy. For example, a number of countries, including France and Spain, have postponed the implementation of the next stage of reducing their budget deficits. Italy is in the process of abolishing the previously planned tax increase, and Spain has unveiled a new economic program that provides for large-scale investments to support the country's business sector.

Along with the appearance of signs of a change in approach to fiscal policy, there is evidence that the European Central Bank is re-considering measures that would be appropriate to take in this situation. After another cut in interest rates at the beginning of May, the ECB seems ready to take new steps to stimulate a slow-moving economy. In a recent speech, European Central Bank President Mario Draghi hinted at the possibility of introducing negative interest rates on commercial bank deposits with the ECB.

The management of the European Central Bank hopes that lower interest rates will push commercial banks in Europe to increase the supply of loans to the business sector, which will entail increased economic activity and improved employment rates in European countries. It will be interesting to see if the emerging change in approach to the fiscal policy of the governments of European countries and the ECB, the monetary policy, will lead to economic recovery in Europe.

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