Her fears were echoed this week by the International Monetary Fund. It increased its forecast of the scale of the contraction in euro area GDP this year from 0.4 to 0.6 per cent, citing "ailing banks'" inability to lend and the effects of tight fiscal policy. "More monetary easing will likely be necessary," it said.
But the European Central Bank (ECB) this week muddied the waters on this point. Last week, ECB president Mario Draghi cheered the markets by promising to keep interest rates at present levels or lower for an "extended period of time". But this week, the ECB refused to say how long this period would be, hinting that it might be less than 12 months.
Yet another problem for the region is that it has been hit by the rise in global bond yields caused by the US Federal Reserve's suggestion that it will "taper" its bond-buying programme later this year. In the last month, 10-year Italian and Spanish yields have risen by more than 0.2 percentage points, while Portuguese yields have jumped more than half a percentage point. These rises are modest, but could continue if stronger growth outside Europe pushes up global bond yields even more. This poses the danger of economies falling into a debt trap, whereby high debt service costs and weak growth make it impossible to reduce government debt.
It's widely agreed that a weak euro area matters hugely for the UK simply because over 40 per cent of our exports go to the region, and so a faltering euro area makes it unlikely that the UK economy can rebalance towards exports. But this is only part of the story. This week's figures showed that UK exports to relatively resilient Germany have fallen by 9.8 per cent in the past 12 months, while exports to the rest of the region have risen slightly. This implies that the UK's economic problem is not simply the weakness of euro area activity.
