Outlook for Euro Area Worsens Due to Rising Financial Instability
- The Conference Board Leading Economic Index® (LEI) for the Euro Area fell in May, led by declines in confidence indicators and stock prices
- As slower growth in the rest of the world (U.S., China) is not offsetting Euro Area losses, recession will extend into second half of 2012
- Bailout of Bankia set off deeper banking crisis in Spain, which led to a request for a 100 billion euro bailout for a broader group of troubled banks
- Uncertainty about Greece’s willingness to comply with the terms of its bailout agreement adds to financial risk, even after pro-bailout party emerged victorious in election
- Gradual movement toward more joint responsibility, such as a banking union, is more likely than a radical policy breakthrough or collapse; EU leaders may consider these issues at today’s and tomorrow’s summit
- Fiscal programs are likely to represent a drag on the Euro Area economy in 2012 and 2013, especially in the weakest countries
