Eurozone crisis to further escalate in 2012 – Ifo president Sinn

06 January 2012 20:40  [Source: ICIS news]

LONDON (ICIS)--The eurozone debt crisis will likely further escalate in 2012, the president of Munich-based economics research institute Ifo said on Friday.

“The crisis in the currency union will continue,” Hans-Werner Sinn said in an article he contributed to Wirtschaftswoche, a weekly German business journal.

“I predict: The efforts to rescue the euro currency union will continue [in 2012], and will, at the end of a day, result in a ‘transfer union’,” Sinn said. 

The term "transfer union" implies that the stronger members of the euro currency union will end up bailing out the weaker members via financial transfers of taxpayer monies.

Sinn said so far the eurozone crisis kept getting worse, despite the many rescue packages and measures EU leaders agreed last year.

Sinn also predicted that the eurozone as a whole will go into recession in 2012.

The budget cuts and savings measures implemented in Greece, Italy and other troubled eurozone countries were “the right therapy”, he said.

“However, as is often the case with good medicine, there will be side-effects” in the form of lower demand and much higher unemployment, Sinn said.

Sinn also said the US is not likely to go into recession in 2012.

Nevertheless, US GDP would grow only at “snail’s pace” because Congress lacked the funds to stimulate the economy.

In addition, the US housing market remained weak and the country still had relatively high unemployment, he said.

Germany, for its part, might be able to survive the eurozone crisis relatively unscathed as strong domestic demand should help offset declining export demand, in particular from the eurozone, Sinn said.

Sinn pointed to a growing German housing and construction market, which should end up benefiting from the crisis, he said.

“After those horrible times when banks and insurance firms invested our savings in Lehman Brothers' certificates and Greek government papers, today money is increasingly flowing into [housing],” he said.

Some economists have forecast that Germany will go into a short recession early this year.

Paul Hodges studies key influences shaping the chemical industry in his Chemicals and the Economy Blog

By: Stefan Baumgarten
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