Eurozone economy past the worst, on road to recovery

As latest data and confidence indicators point toward a modest recovery in the eurozone economy, Prof. Marcel Fratzscher, president of the German Institute for Economic Research, said that the recover would be gradual with interest rates remaining low for at least another two years. "The eurozone has already hit rock bottom. Especially the debt-stricken countries including Spain and Italy are very likely to reach the lowest point before the end of this year and achieve positive growth in the next year. Yet Greece remains an exception," Fratzscher said in an interview with Xinhua. Fratzscher said the German economy would continue to be the most important pillar of the eurozone. "Although Germany may only achieve weak growth this year due to impacts of long winter days, it would very probably make a GDP growth of 1.8 percent next year." "With weak external demand, the contribution of net export to German economic growth will remain weak or negative. The ratio of both public and private investment to GDP in Germany has been low compared to other industrialized countries, which would not change much in the short term. So domestic demand will benefit from a strong job market and continue to promote the German economy in this and the next year," he said. Germany has an investment gap of 80 billion euros (106 billion U.S. dollars), and if this gap could be filled, the medium to long-term growth potential of Germany can be increased by 0.6 percent, he added. As to the situation in France, which registered quarter-on-quarter growth of 0.5 percent in the second quarter, Fratzscher felt it "is not entirely clear, but I personally am not that pessimistic." In his view, France has a sound investment and a good industrial basis and the main challenges lie in the flexibility of labor markets, welfare reform and fiscal consolidation. "When progress is made in these aspects, we could expect moderate growth in France." For Spain and Italy, Fratzscher said "we expect these two countrie to have positve growth again towards the end of this year, and then to recover at a slow pace." Spain has a good car export and manufacturing base, as well as a better access to the financial markets, he added, while Italy has a good industrial foundation along with good SMEs. "Italy should continue to promote the reforms in their labor markets to enhance competitiveness," said Fratzscher. He expects the unemployment rate to fall after the economy begins to grow in these two countries. Debt problems in Greece and Cyprus remain unresolved, Fratzscher said, adding Greece's debt was not sustainable, and that its government should work together with other EU countries to avoid a worsening of the situation. A number of internal and external risks continue to threaten economic recovery in the eurozone, he said. For example, Spain still needs about 170 billion euros to clean up bad debts. In the meanwhile, stability in emerging markets, particularly in China and other countries in Asia, is very important for economic recovery in the euro area. Fratzscher expected the European Central Bank to maintain a loose monetary policy for at least another two years. "Our data shows the eurozone inflation rate is right below 2 percent; we currently see no danger of inflation," he said. The German Institute for Economic Research, founded in 1925 and located in Berlin, is one of the leading economic research institutions in Germany. Its core mandates are applied economic research and economic policy consulting as well as provision of research infrastructure.