Among developed economies, growth in the
European Union (EU) is expected to shrink for the
second consecutive year, with a particularly severe
economic contraction in the euro area. Private demand
remains subdued, especially in the euro-zone periphery
countries (Greece, I reland, I taly, Portugal and Spain),
due to high unemployment, wage compression, low
consumer confidence and the still incomplete process
of balance sheet consolidation. Given the ongoing
process of deleveraging, expansionary monetary
policies have failed to increase the supply of credit
for productive activities. I n this context, continued
fiscal tightening makes a return to a higher growth
trajectory highly unlikely, as it adds a deflationary
impulse to already weak private demand. While foreign
trade (mainly through the reduction of imports)
contributed to growth in the euro area, this was more
than offset by the negative effect of contracting
domestic demand, which even the surplus countries
have been reluctant to stimulate. This perpetuates
disequilibrium within the euro zone and reduces the
scope for an export-led recovery of other countries
in the zone. Hence, despite the fact that the tensions
in the financial markets of the euro area have receded
following intervention by the E uropean Central
Bank (ECB), prospects for a resumption of growth