Will Europe Grow Its Economy in 2013?

european central bankWhen history looks back on the financial crisis and studies its deep, wide-sweeping effects on the global economy, it seems likely that Europe will be recognized as the region where the hardest battles were fought. Unemployment across the euro zone hit a record high of 11.8 percent toward the end of 2012, and GDP is expected to contract for a second straight year. The common currency was put on the chopping block, and the butcher’s hand was stayed only by the extraordinary efforts of the International Monetary Fund, the European Central Bank, and national finance ministers.

Mario Draghi, president of the ECB, has been hailed as the euro’s savior because of a bond-buying program that diffused what became a dangerous level of tension in the markets last year. Draghi spearheaded operations that demonstrated commitment to nations in crisis, such as Spain, Greece, and Italy, removing crippling uncertainty about the fate of the region and the currency.

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Now, after billions in bailouts and severe austerity measures that sparked riots across the region, market sentiment is struggling to remain positive. Many of the mechanisms necessary for recovery have been put in place, but there’s no guarantee that things won’t get worse before they get better.

At the World Economic Forum’s annual meeting in Davos, currently underway, Draghi said that while the bond-buying maneuver helped remove risk for the euro, “we haven’t seen an equal momentum on the real side of the economy.”

Mario DraghiMomentum on the real side of the economy would mean curbing rampant joblessness in many southern-European nations. It would mean a stable, falling debt load for Greece, and successful financial reform in Spain. And it would mean strength in the manufacturing industry, which has been in contraction for 16 of the past 17 months.

Chris Williamson, chief economist at Markit, which compiles the PMI report, echoes the sentiment of European officials when he frames the situation as a slowing contraction. Aside from the PMI, he said that “forward-looking indicators — such as business confidence and the new orders-to-inventory ratio — also suggest that the rate of decline will continue to slow in the coming months.”

Williamson is looking at the first half of 2013 for a return to growth, but others are not as optimistic. Automotive industry officials have pegged the middle of the decade for a turnaround in the car market. Draghi himself is looking at the second-half of 2013 for positive numbers.

“We can have a positive development if national governments persevere in their actions both in fiscal consolidation but also on the front of structural reforms,” he said at Davos. “To say the least, the jury is still out.” His comments are punctuated by the threat of a triple-dip recession in Britain at the start of 2012, and contraction in Germany and France, two of the region’s largest economies.

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