Projections of EU GDP

Gennaro Zezza | December 12, 2011

In our latest Strategic Analysis we estimate that a cut in the general government deficit in the United States would have strong adverse effects on unemployment and a relatively smaller impact on the U.S. public debt-to-GDP ratio, since GDP would slow down with a cut in government expenditures and transfers.

A similar strategy of deficit reduction seems to be on the agenda for many eurozone countries; notably Italy, where a new government was recently put in charge to implement unpopular tax increases that the Berlusconi government was not willing to adopt.

A comparison of our simulation for the U.S. with the European Commission’s for the eurozone may therefore be interesting.

First of all, the United States is now (third quarter of 2011) back to the pre-recession level of output, as measured by real GDP. Using this figure we could say that the recession is behind us, and we can plan for the future (although this is far from true if we look at the unemployment rate!). And in our projections we show that an acceleration in aggregate demand is needed if the unemployment rate is going to be reduced (the green line), while policies to cut the government deficit will lead to stagnation (the red line) and an increase in unemployment.

Let’s look at a similar chart for Europe, taken from a simple synthesis of the new roles for economic governance in the area:

Real GDP in the area is still below its pre-recession level, and stagnating. We would think that European governments would be meeting frequently to discuss how to recover the lost ground in output and employment, but instead they meet with quite a different problem in mind: how to enforce balanced budget rules on national governments. The Italian government, still one of the largest economies in the area, is now passing a bill that will increase taxes substantially, further depressing domestic demand.

What the EU is planning is the wrong policy at the wrong time. And if the multiplier in the EU is similar to what we estimate for the United States, the consequences for the unemployment rate will be substantial.


10 Responses to “Projections of EU GDP”

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  1. Comment by Lucio PicciDecember 12, 2011 at 11:41 am   Reply

    wrong policy, fine with me, but then, if you were in Pres. Monti’s shoes, how would you pull the fiscal lever? Has he got a choice?

    • Comment by Gennaro Zezza — December 12, 2011 at 1:42 pm   Reply

      Lucio, pulling the fiscal lever IS the wrong choice. In a different institutional setting, Italy could roll on its debt without serious problems, while working to restore its ability to collect taxes. I believe it is not a coincidence that markets started betting on the default of the two countries, Greece and Italy, with the largest share of shadow economy and tax elusion in the EC.
      With no changes to the European institutional setting, any austerity package will generate a drop in GDP and therefore tax revenues: reducing the debt to GDP ratio will be painful, with the denominator falling with the numerator. On the other hand, several solutions to “fix” the situation are now being proposed, which differ in technical details but would allow deficit countries to buy the time they need: a simple, recent one is from Palley

      • Comment by Oliver — December 13, 2011 at 3:33 am   Reply

        But that’s just another name for the dreaded Eurobond solution that Merkel and friends have vowed to prevent come hell or high water. And it wouldn’t solve Italy’s or Greece’s tax collecting problem as such, only buy them time to do so by their own free will. The problem is that Neoliberalism does not believe in the free will of the debtor. It is a self fulfilling prophecy invented by protestants creditors for protenstant creditors. If there cannot be gain without pain, then reducing pain will never produce a gain. And pain is fine, as long as it’s someone else’s.

        • Comment by Gennaro Zezza — December 13, 2011 at 3:41 am   Reply

          I agree. But Germany does have a mechanism to ensure their debt is rolled over, with the Bundensbank holding any unsold bonds until they can be “sold in the secondary market”, a mechanism very similar to that they vowed to prevent for their European partners!

          • Comment by Ramanan — December 13, 2011 at 1:45 pm  

            Dear Gennaro,

            I think that there was a miscommunication because of an article from FT Alphaville. A found a document by Eurex which clearly said that the issuer is not credited until the retained bonds have been sold in the secondary markets.

            I have a blog and had two posts on this:


            (I owe the blog’s subtitle to your article from Dec 2008!).

            In my opinion, Germany could do it (the government) because it has huge amount of financial assets (second post).

          • Comment by Gennaro Zezza — December 13, 2011 at 2:01 pm  

            Dear Ramanam, I wrote that the Bundensbank would “hold”, rather than buy, the bonds, to sell them later in the secondary market, so I don’t necessarily disagree with what you have posted in your blog.
            My source was a quite detailed description of what happened, published in Italian here

          • Comment by Oliver — December 14, 2011 at 9:30 am  

            I can’t read Italian, but maybe one could say that the effect of being able to withold bunds for a while can dampen the psychological effects of a failed auction somewhat, thus lessening the probability of a run? Call it the confidence fairy, call it Chuck Norris tatics, it may not work if seriously challenged by the markets, but the likelyhood of being challenged is significantly reduced.

  2. Comment by Luigi — December 13, 2011 at 3:39 pm   Reply

    Prof Zezza,

    There is an analysis of the italian economy, post war (1950 – 1980 ca) in terms of stock-flow consistent model?

    I was searching also an image about sectoral balances in that period. Does exist?


    PS: a little curiosity, how many economists in Italy use stock-flow model? I was reading something by people like Emiliano Brancaccio, Riccardo Bellofiore but I haven’t see nothing similar. Brancaccio has written also a paper, Anti-Blanchard, he makes critiques that sound good but there isn’t a clean reject of the AD/AS model.

    (sicuramente comunque il modello stock-flow non lo usano quelli di noisefromamerika!)

    • Comment by Gennaro Zezza — December 13, 2011 at 5:16 pm   Reply

      Luigi, maybe you can redirect your queries to our stock-flow models website at
      Anyway, I don’t know of any analysis of the Italian economy using the sfc approach. I am working on a model of the European economy, which will include a model for Italy, but will not cover the years before 1970, for which data sources are not easy to get.
      Bellofiore does not use the sfc approach, but some of his students do: there were two workshops on sfc modeling in Bergamo in the last 12 months. Brancaccio does not use this approach, as far as I know.
      The web site has been built exactly to encourage people interested in this approach to exchange ideas, so please follow up with this exchange on that site

  3. Comment by Ramanan — December 15, 2011 at 4:04 pm   Reply

    Hi Gennaro,

    Do you know if someone has done calculations such as income/price elasticity of imports for each nation in the Euro Area etc?

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