Blog post

Policy complacency is the greatest threat to euro area growth

On 25 February 2014, the European Commission released its Winter 2014 Forecast document. After a double-dip recession and two consecutive ye

Publishing date
27 February 2014
Alessio Terzi

On 25 February 2014, the European Commission released its Winter 2014 Forecast document. As broadly ancipated, the Commission services revised (slighly) upward their forecast for euro area real GDP growth, on the back of positive cyclical indicators, a milder aggregate fiscal stance, and the expectation that structural reforms will start to bear fruit. Since November, when the last forecast was released, euro area GDP growth was revised up by 0.1% both in 2014 and 2015, to 1.2% and 1.8%, respectively. After a double-dip recession and two consecutive years of negative growth, the Commission seems to be prospecting the famous “light at the end of the tunnel”.

I would however caution against excessive optimism or, as Ashoka Mody called it recently, Europhoria. As displayed in the figure below, the Commission forecasts for the euro area have been systematically revised down over the past few years. In 2010, euro area 2012 growth was expected to come in at 1.8%, up from 1.5% in 2011. This figure was then revised down to 0.5%, then -0.4%, and the realisation came in at -0.7%. Similarly, in 2011 the Commission was penciling in just a minor dip in 2012 and expecting growth to rebound forcefully in 2013. This did not materialise, and actually 2013 was another year in which growth was in the red.

By anaylsing Commission Forecast documents over the period 1969-2011, Gonzales-Cabanillas and Terzi (2012) debunk the claim that the Commission displays a significant over-optimistic forecast bias for the EU or the euro area. However, it is accepted that its forecast accuracy deteriorates significantly during economic downturns – perhaps due to the haste to forecast a turn in the cycle.


It would be very unfortunate if European policy-makers were to interpret these mild good news as sufficient to pat each other on the shoulder, sit back and relax. Euro area unemployment has stabilised around 12.0%. Together with youth unemployement at around 24%, these are the highest levels observed in over a decade. The euro area outlook is still characterised by several risks going ahead. Large public and private debt overhangs, together with a banking sector which still needs restructuring, leave the euro area in a precarious condition. Moreover, the threat of potential deflation is looming and Wolff recently argued that the ECB should be more aggressive in tackling this risk. The greatest threat from and to the current more positive outlook, is that it might engender policy complacency. As the Commission itself concludes, “There is still some sailing to do before we reach harbour”.


About the authors

  • Alessio Terzi

    Alessio Terzi, an Italian citizen, joined Bruegel in October 2013. Prior to this, Alessio was a Research Analyst in the EMU governance division of the European Central Bank. He has also worked for the macroeconomic forecasting unit of DG ECFIN (European Commission), the Scottish Parliament’s Financial Scrutiny Unit, and BMI Research (Fitch group), a country risk and forecasting firm in the City of London, where he was a Europe Analyst.

    He holds a Bachelor's degree in International Economics from Bocconi University and an MPA in European Economic Policy from the London School of Economics, where he specialised in public economics. During his studies, he spent a semester at Dartmouth College (USA). Alessio’s main research interests include structural reforms, competitiveness, EMU governance, and the G20.

    Between 2016-2018, Alessio was a Visiting Fulbright Fellow at the Kennedy School of Government of Harvard University. He completed a PhD in Political Economy at the Hertie School of Governance in Berlin, with a thesis on economic growth, written under the supervision of prof. Henrik Enderlein, Dani Rodrik, and Jean Pisani-Ferry.

    He is fluent in Italian and English, has a good knowledge of French, and an intermediate level of German and Spanish.

    Declaration of interests 2015

    Declaration of interests 2016

    Declaration of interests 2017

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