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Euro-Zone Crisis End in Sight, but Painful Path Ahead: E&Y

Wednesday, 12 Dec 2012 | 7:00 PM ET
Greece Euro Vice
Ulrich Baumgarten | Getty Images
Greece Euro Vice

After years of economic troubles, an end to the euro-zone crisis is finally visible, but there is still plenty of pain to come, according to a new forecast.

The second half of the single currency region's double-dip recession will remain "relatively shallow," but its recovery will be "long and laborious," according to Ernst & Young, one of the world's largest professional-services firms. The company's quarterly euro-zone forecast predicted that gross domestic product growth in the euro zone will shrink by 0.4 percent in 2013, followed by "anemic" growth of around 1.3 percent annually between 2014 and 2016.

"Although there are some positive indicators for the euro zone this is just the beginning of the road," Marie Diron, senior economic adviser to the forecast, said.

"Further steps to complete frameworks for both a banking and fiscal union, the introduction of some form of eurobond and the full implementation of the Growth Pact should help to begin to restore confidence although they are unlikely to alter prospects for demand and growth in the short term."

This is in-line with forecasts from the European Central Bank (ECB), which last week cut its predictions for growth in euro zone GDP to between minus-0.9 percent and 0.3 percent.

Interest rates will remain at their current historic low of 0.75 percent until 2017, the report suggests. This may fuel fears that the euro zone will end up following Japan into a low-growth, low-interest rate environment.

Will the ECB Become More Aggressive?
Marie Diron, senior economic advisor at Ernst and Young and Vicky Pryce, senior managing director for economics at FTI Consulting discuss whether the ECB will follow the Fed and ease more aggressively.

(Read More: Japan's Warning Signals to the West)

Europe could be facing a "lost decade" with a combination of low growth and unemployment peaking at close to 20 million in 2013, according to Ernst & Young.

The heavily indebted, struggling peripheral economies are expected to see the highest rate of unemployment, with the unemployment rate expected to reach over 28 percent in Greece, 26 percent in Spain and almost 17 percent in Portugal. The likelihood of Greece leaving the euro zone has decreased from 15 percent to 5 percent after action by other euro-zone governments and the ECB designed to keep it and other peripheral economies inside the single currency, the report argued.

"The markets seem much more convinced than they did in the early summer that the euro zone will survive," Diron said.

"However, growth performance within the euro zone is set to remain divided, with the core countries expected to continue to out-perform the troubled peripherals, with the latter struggling to grow at all over the next few years," she said.

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