Gold Magazine June - July 2013, Issue 27 | Page 92

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n its regular six-month report, which was published
last month, the OECD
(Organization for Economic Cooperation and
Development) states that the
prolonged weakness in Europe
“can turn into stagnation with
negative implications for the
global economy”. The OECD
again slashed its forecast for the
economy of the 17-country eurozone, saying that it will shrink by
0.6% this year, after a 0.5% drop
in 2012. It had predicted a 0.1%
decline for the eurozone in its previous
report while this time last year, it forecast
growth of nearly 1% for 2013. The OECD
is not the only international body that predicts
further economic contraction for Europe. The
European Commission itself expects to see a
contraction of 0.1% in the EU and 0.4% in
the euro area this year.
Petr Zemcik says that this contraction will
continue in the second quarter but by the end
of the year “There is hope that some growth
will appear which will originate from outside
the eurozone”.
Noting that the economic prospects of the
US and some emerging markets are much
better than those of Europe’s Zemcik explains
that, “One of the things that helped the US is
that they cleaned up their banking sector years
ago. This is still having a positive impact to
this day. The balance sheets of their banks are
very strong, which means that credit is flowing
into the economy. The housing market is now
going very well after years of downturn.” The
US economy is predicted to grow by perhaps
2% this year, Zemcik adds. “The only risk to
its outlook is US fiscal policy, which is problematic.”
China is expected to experience a slowdown.
“We cannot expect a growth rate of 8% or
10% as we saw in the past,” he says. “It is going to be around 7%, maybe less. China is
going through the transition from an economy
which relied on investment to a consumption
economy. The transition is going to take some
time but growth, even though slower, will
be sustainable.” Asked about other emerging
markets such as Brazil and Russia, he notes
that both economies have slowed down. “This
poses a risk to the European economy,” he
warns. If the emerging markets are not doing
well, Eur ope is not going to do well either.”
It might be expected that Europe will be
unable to generate growth amid a prolonged

very slowly and they pay off even more
slowly in many cases. We have already
seen some improvement in competitiveness but it will take much longer to
bring about a greater effect. A positive
impact might be witnessed in a year
or two at the earliest.”
The benefits of austerity are not
always obvious but is there a real
choice? Can austerity be avoided?
No, says Petr Zemcik. “Clearly,
there isn’t a choice. We need to
correct the fiscal deficits, to make it
very clear what the fiscal position is,
and to make it sustainable in the long
term. Some countries are making progress,
including Greece and Italy, where the cyclically adjusted deficit is actually close to zero
this year. The question is how to go about it.
How to reform the budget and how to spread
the reforms over time? There are lessons to be
learned. Unfortunately they are not learned
fast enough. For example, it is generally better
to cut spending than to increase taxes. This
has better growth perspectives. If, on the other
hand, a country must increase taxes, it makes
more sense to increase property taxes than
VAT, for example.”
According to Zemcik, cleaning up fiscal
budgets will bring some confidence back to the
markets and it will boost consumption and investment. “Domestic consumption and investment are actually the most problematic areas at
the moment because of the uncertainty. People
are not investing because of higher taxes and
uncertainty regarding their future incomes.”
Equally important is the banking sector, he
says. “Reform of the banking sector is a crucial
component which needs to be stabilized. The
lack of credit is the biggest problem in Europe
right now. The banking sector needs to be
cleaned up and for that to happen we need to
move towards a banking union.”
The eurozone, as Zemcik sees it, faces a
double problem with its banking sector. “On
the one hand,” he says, “we want the banks
to be safe, while on the other we want them
to lend to boost the economy. Both supply
and demand of credit are low at the moment.
Demand is low because of the investment
environment and supply because of conservatism.” What banks should be doing, he says,
is increasing confidence and, simultaneously,
being able to provide loans. “One way of doing this is to establish the banking union. If the
banking sector works, no matter what the government does, then we solve the problem.”

Clean-Up
Time
period of austerity imposed on a number of
its member states but will austerity eventually
bear fruit? Zemcik replies affirmatively. “In
the long run, some of the structural changes
imposed through the austerity programmes,
such as lower unit labour costs and corrected
current account balances, etc., are going to
have an impact. We expect it to appear in the
next year. Growth will probably start by the
end of this year and will be relatively accelerated next year but in order to reach the GDP
level of 2008 we shall probably have to wait up
to 2015.”

It is generally
better to cut
spending than to
increase taxes
But are the ultimate benefits of austerity
strong enough to justify the pain related to
fiscal consolidation measures? Zemcik believes
that, despite signs of increasing competitiveness in a number of the countries which are
undergoing structural reforms, more was expected. “We have not seen the results we wanted to see. For instance, we would like current
account balances to be corrected by increasing
exports rather than by cutting imports.” And
what are the underlying reasons for these
worse-than-expected results? “What seems to
be happening is that these economies are closing down instead of opening up,” says Zemcik.
“Structural reforms are being implemented

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