What Happened In Europe?

Lower oil prices and a less overvalued euro could make life more pleasant for consumers and producers in the eurozone. While exports could regain momentum, consumer spending could gradually recover once households no longer have to hand the increase in their incomes over to the oil producers. Lessening inflation pressures in the absence of any new oil shock could enable the ECB to stay on hold until late 2009 even if growth gets going again next spring.

Most fundamentally, the eurozone has not yet reaped the full benefits of the labor market reforms Germany instituted from 2003 to 2007, and that France is pushing through now. In the next few years, the employment and income prospects in Europe's two largest economies should improve. There are downside risks. The U.S. economy could lurch into a severe recession. The global financial crisis could get much worse, bringing the credit crunch to the eurozone. But these risks can be avoided. It will probably take until mid-2009 for the upswing to regain some of the vigor it had before the oil and euro shocks blew it off-course.

Schmieding is chief economist for Europe at Bank of America in London

© 2008