During the past year the future of the euro-zone was quite uncertain with raising debt, countries not being able to pay it off, and with many Germans feeling it was not fair for everyone to look towards the strong nation for financial help. The severe weather worsened the situation by slowing down activity and resulting in a low 0.3% growth during last quarter of 2010.
However, 2011 brings good news. According to The Wall Street Journal, euro-zone is expected to grow 0.7% during first quarter this year. Furthermore, there has been an increase in manufacturing new orders and exports. Employment was reported to have risen in February as well. Lastly, divergence across economies seems to be shrinking, however Germany and France are still in the lead far ahead from Spain and Italy.
These are all good indicators, but there is a catch. Together with productivity, prices have been rising as well. This in turn might lead to the European Central Bank to raise interest rates. The consequences of higher interest rates would be devastating for countries such as Greece and Portugal as they are already struggling with repaying debt. Therefore, the focus on the market is turning towards price development.
One thing to keep in mind is that the euro-zone inflation index includes fuel and food which many other nations exclude from the calculation. Including fuel and food makes euro-zone inflation a higher number.
What do you think will happen with euro-zone growth this year? How big of a threat is raising inflation?