Since the European Central Bank is the key institution in resolving the European situation, it’s worth paying attention to their forecasts for 2012 largely because they amount to the ECB predicting catastrophe. Here’s a glance at the nominal output they’re expecting:
A couple of things to note here. One is that if you assume the ECB is just trying to target Eurozone inflation and doesn’t care about anything else, this is the ECB predicting that it will fail and inflation will be too low at 1.6 percent. Alternatively, if you assume the ECB only cares about German inflation, the conclusion is again that the ECB predicting that it will fail and inflation will be too low, this time at 1.4 percent. Inflation will be above the ECB’s 2 percent target in the countries of Belgium, Estonia, Cyprus, Malta, Austria, and Finland. Nominal GDP across the Eurozone will average an anemic 2.1 percent, with Germany slightly higher and Italy slightly lower.
This is a recipe for disaster. When a central bank has a “prediction” like this months out, it ought to be running around promising to prevent it. It’s like predicting that your poor diet will give you a heart attack in six months when you should be resolving to eat better.