Economic growth has been hampered by deepening tensions in the financial markets, combined with rising unemployment and deleveraging of both the public and private sector, say Chief Economists of the EBF Economic and Monetary Affairs Committee (EMAC) in their end of year outlook on the euro area economy.

Depicting a move away from the picture painted in their mid-term review just a few months ago, their report dubbed - Economic Growth is the Cure - surmises that external demand to help maintain economic growth can no longer be relied on due to a number of factors: the slowing down of emerging market economies, excessive public debt burdening the US economy and the unstable global geopolitical environment.

The EMAC Chief Economists expect to see the euro area economy shrinking by around 0.5% at the end of this year, and largely stagnating next year, with a possible 0.1% GDP growth. Encouraging though, they do not see inflation posing a threat to economic stability in the immediate future.

They further estimate that inflation will approach the European Central Bank’s medium term target, close to but below 2% in 2013. What is more, the ECB is expected to maintain the refinancing rate of 0.75% stable throughout the forecast period.

“Unfortunately, fiscal austerity combined with negative growth rates of investment translates in rising unemployment accompanied by increasing social unrest in many countries,” declared Dimitris Malliaropulos, Chair of EMAC. “Lower employment and very modest credit growth while the domestic capacity to spend and invest is falling, are all invariably slowing euro area economic growth.”

But Malliaropulos says there is light at the end of the tunnel. “If the European authorities take bolder steps towards a genuine Economic and Monetary Union, with a Single European Supervisor under the proposal for a Banking Union, confidence in EU policy and a positive economic future could help revive the markets.”

He concedes that due to the long-term nature of policies bein

g introduced, the results of EU economic growth policies will only gradually emerge. But he emphasises that the Commission and the national governments will need to urgently develop a “compelling and credible plan to help the euro area economy get back on its feet.”