Leading economists warn against widening gap within Europe

The economic gap between northern and southern Europe is widening further as austerity measures bite and the process of deleveraging continues.

While governments across Europe crack down further on spending in 2013, the belt-tightening will be felt more in the south than in the north, professor Andrea Boltho, University of Oxford Director at Oxford Economics, told delegates at the ULI Europe annual conference in Paris this week.

'In Southern Europe, confidence is down below levels during the 2009 recession. This year, we will see more divergence rather than convergence (in Europe ed.) and I'm increasingly worried about that.'

After the 'orgy of debt' in southern European countries following convergence of long-term interest rates with the northern countries, the south now has to deleverage, Boltho pointed out. ‘And deleveraging is a very slow process.’

The fiscal drag on economies in Europe as well as the US is leading to a ‘tug of war’ between deflationary and inflationary forces, noted professor Arthur Segal, Poorvu Family Professor of Management Practice at Harvard Business School. 'We're in uncharted waters,' he said. 'Nobody can make a prediction that we won't see inflation in the next five years. History shows that periods of high inflation are not foreseen and anticipated at the time.'

But as long as Germany continues to see 'Inflation' as the ‘big bad wolf’, there is no danger that the quantitative easing of the recent past will lead to prices spiraling out of control in Europe, countered Boltho. Pointing to the US where inflation remains confined to 2.5% despite three successive bouts of quantitative easing, he said: 'I see no danger of inflation. I'm confident that the central banks can control inflation and withdraw money if necessary.'