The Swedish Economy August 2012

36 Macroeconomic Development and Economic Policy 2012–2016mented in Spain and Italy, for example, and the innate dynamismof market forces, point to more gradual cost increases inthe less competitive countries. The euro area can thereby approachthe internal balance that will strengthen economicgrowth in the deficit countries. This will enhance the credibilityof claims that solvency can be achieved for banks and governments,which would support recovery in the euro area. 19 Despitethese measures, GDP growth in the next few years will be low,according to the forecast. Resource utilization will probably notreturn to normal until the end of the current decade.An Alternative Scenario: Recovery in theEuro Area Delayed 20RECESSION IN THE EURO AREA MORE PROLONGED ANDMORE SEVEREA basic assumption in the scenarios is that the concern aboutthe solvency of banks and countries persists next year and thatthe adjustment of costs is more sluggish than in the forecast.One reason for studying such scenarios is the high degree ofuncertainty surrounding the assessment in the forecast of thetiming and effects of necessary political decisions. It is not improbablethat the measures currently under consideration will beeither torpedoed or once again regarded as inadequate. In thatcase the uncertainty about government finances and the futureof the currency union will put a brake on growth in the euro areanext year as well, when growth will be positive, though low, inthe forecast. Another reason for such a development would bethat the structural reforms mentioned above might not have theintended effect, or might be repealed. Not the least importantfactor in this connection is the uncertainty about the politicalfuture in Italy, where parliamentary elections will be held in thespring of 2013. The current prime minister, Mario Monti – regardedby many as a key figure in the implementation of thereforms – has announced that he will not be available after theelection. It is not inconceivable that a new government wouldhave a less ambitious agenda for structural reforms than the19 Some support to the claim that the process of cost adjustment has begun can befound in recent developments.20 In The Swedish Economy, August 2011, an alternative scenario was presented inthe special analysis “Effects of a More Severe Debt Crisis in the Euro Area.” Thefocus of that special analysis was a severe recession in 2012 caused by increasinglyserious financing problems for banks and countries in the euro area. The alternativescenario presented here focuses instead on a more prolonged process of achievingcredibility for the solvency of governments and banks, as well as more sluggishadjustment of prices in the euro area. Both of these factors lead to slower realeconomic recovery in the euro area.