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Economic Trends in the EU in 1996: Slow Economic Expansion without Relief for the Labor Market and the Public Sector

Listed author(s):
  • Markus Marterbauer


With a growth rate of only 1½ percent in real terms, economic activity was weak in the EU in 1996. The strong upturn after the end of the recession of 1992-93 faltered as early as in the first half of 1995 on account of unstable exchange rates, high interest rates, and restrictive fiscal policies. Demand and production remained flat until the first half of 1996. The recovery setting in then, slow and fragile at first, was mostly driven by an expansion in exports. Import demand from important trading partners of the EU, mainly the USA and East-Central Europe, was lively; at the same time, the competitive position of European exporters vis-à-vis the dollar area improved with the strengthening of the dollar. Trade between the member countries of the EU is also estimated to have expanded at a lively pace. Production expectations and business climate indicators in manufacturing improved markedly since the middle of the year. The austerity policy pursued by the majority of the EU countries at the same time – public deficits had soared after the recession of 1992-93 – tended to depress each country's domestic consumption and investment demand and, by dampening import demand, also export demand in other EU countries, an effect that was reinforced by the tight linkage between the EU economies. Consumer confidence was subdued in most countries. Economic growth in Europe was too weak to relieve the strains in the labor market; employment stagnated and the unemployment rate rose to 11 percent. The development of the labor market was more favorable in those countries with an above-average expansion of production and demand, such as Denmark, Finland, the Netherlands, Spain, and the U.K. The highest increase in the unemployment rate, by about ¾ percentage point, was recorded in Germany, France, and Sweden. The slow growth in revenues and the rise in expenditures on unemployment relief, both a result of the weakness in economic activity, impeded fast progress in the consolidation of public sector budgets. Despite comprehensive discretionary measures with regard to taxes and expenditures, public sector deficits declined only marginally to 4½ percent of GDP (1995 5 percent). Inflation continues to follow a downward trend. The inflation rate was 2 percent in the EU on average. The decrease was particularly pronounced in countries with high inflation; in Italy, the rate of price increase declined from 5.6 percent in December 1995 to 2.7 percent in December 1996. The risk of an upturn in inflation is very low in the current economic situation.

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Article provided by WIFO in its journal WIFO-Monatsberichte.

Volume (Year): 70 (1997)
Issue (Month): 4 (April)
Pages: 213-217

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Handle: RePEc:wfo:monber:y:1997:i:4:p:213-217
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