Rehn of Error - a systemic false belief that austerity will work!

By Jeremy Smith

Last week the European Commission published its Winter 2013 economic forecast, covering the expected outturn for 2012 as well as forecasts for the current year and 2014.

To assess the Commission’s accuracy in forecasting, we have looked at what it predicted, at different times, for 2012. We have taken its numbers for each country’s GDP, and the GDP for the Euro Area and EU, in its Spring 2011, Autumn 2011 and Spring 2012 forecasts. The table below sets out the detail.

In short, we find that its country predictions over-estimated GDP 66 times (81.48%), under-estimated it 12 times (14.81%), and got it right 3 times. Of the 12 under-estimates, 6 relate to the small Baltic states of Estonia, Latvia and Lithuania.

The Euro Area was over-estimated by 2.4%, 1.1% and 0.3% respectively in the three reports.  EU GDP was over-estimated by 2.2%, 0.9% and 0.3% respectively.

The biggest error over the period relates to Greece where the difference between first estimate and latest projected outturn is a massive 7.5%!

Our point is not to criticize for not getting it spot-on all the time, but to show that there seems to be a systematic bias in its model in favour of predicting more ‘growth’ than was the case.  In other words, the European Commission systematically convinced itself – and wants to convince others – that austerity policies would achieve rapid positive results. But they got it wrong each time through using a flawed analysis.

No wonder Commissioner Rehn is unhappy with the IMF for emphasizing the larger multiplier effect!

EU forecast table 2012
EU forecast table 2012