COMMENT
BILLJAMIESON
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Executive Editor of The Scotsman
Eurozone: Where to from here? Everything now depends on a solution to the sovereign debt crisis.
IN
what has been by any standards the worst financial and economic news flow in Europe for 60 years, let’s start with two items of good news – or news less bad than feared. First, Germany: the eurozone’s largest single economy may still, according to its leading economic research institutes, avoid recession next year. Indeed, there is still the sliver of a possibility that the eurozone as a whole will avoid one, though the pain suffered in some of the peripheral economies – Spain, Italy, Portugal and Greece in particular – will be intense. Second, the UK may also skirt round recession next year, helped by a better than expected performance by exporters. Both these forecasts are heavily predicated on the eurozone’s central banks and political leaders agreeing practical, sufficient and above all immediate measures to cauterise a potentially catastrophic sovereign default and bank solvency crisis sweeping through the whole of Europe and beyond. In mid-October Germany’s leading economic research institutes set out their Joint Economic Forecast. The experts do not see Germany sliding into recession. But they warn that the sovereign debt crisis will increasingly weigh on economic activity. GDP is projected to drop slightly too in the final quarter of this year (a decline of 0.2 per cent quarter-on-quarter). But for the year as a whole, helped by the roaring performance in the first quarter, the economy should still be able to show a solid 2.1 per cent advance. Next year, however, sees a marked slowdown. The economy is still forecast to show growth. But the percentage rate is predicted to be less than one per cent. There is little scope on current plans for any lasting tax relief which the FDP, the government’s junior coalition partner, has been pushing for. As with much of Germany itself, the economic researchers are highly critical of current policy efforts to contain the sovereign debt 6 Industry Europe
crisis. And they oppose the European Central Bank’s sovereign bond purchases and the increase of the European Financial Stabilisation Fund. From a German perspective, the sovereign debt of Greece, closely followed by that of Italy, Spain and Portugal, are huge black clouds being blown towards Germany by other eurozone leaders and about to burst, drowning out what spark of growth remains in higher business and personal taxes. Even if such an outcome can be delayed or mitigated it is not hard to see how it is weighing heavily on business and household confidence in the one economy still capable of growth.
“The concern is less a default by Greece than of contagion across other debtsoaked economies” Hopes that the UK may yet avoid a double dip recession now hang by the barest of threads – an unexpected narrowing of the country’s visible trade deficit in goods in August. This fell from £8.2 billion previously to £7.8 billion. The improvement was the result of a £0.2billion increase in exports which reached their highest value since 1998, and a £0.2billion fall in imports. Excluding oil and erratics, export volumes increased by 1.3 per cent month-on-month and imports volumes rose by 0.3 per cent. Rather surprisingly, given the appalling news flow through the autumn, the EU trade deficit in goods fell from £3.5 billion in July to £2.9 billion in August – over the same period the non-EU deficit widened by £0.2 billion to £4.9 billion. This shows the UK’s close trading
relationship with Europe and the eurozone can drive growth for its exporting manufacturers. However, the squeeze on UK household budgets suggests that while the strength in imports is unlikely to be sustained, exports are also expected to come under pressure as economic activity in the euro area is hit by the continuing financial crisis. Overall trade, including services, should make a small positive contribution to the UK’s third quarter GDP.
Dilemma For UK engineering companies exporting to the eurozone, all this may seem to be clutching at straws. But after two years of failed European summits and emergency meetings, the candle of hope has now all but melted and the flame is flickering. Everything is now riding on a solution to the sovereign debt crisis that has come to dominate events for two years. The concern is less a default by Greece than of contagion across other debt-soaked economies which have seen their sovereign debt yields soar and which have now seen these yields held down by European Central Bank buying intervention. What gives temporary relief to the likes of Spain and Italy terrifies Germany. As if ECB intervention has not already caused deep unease, the prospect that it might be called upon to leverage the eurozone bail-out fund from €440 billion to £2 trillion or even higher, fills many with apprehension: such massive resort to debt – and the money printing press – are all too reminiscent of the behaviour of the country’s central bank in the Weimar Republic – a resort that ended in hyper-inflation and which was to have catastrophic political consequences. The profound dilemma for the eurozone is that the depth of the financial crisis compels an urgent move towards fiscal union, but there is no political will or legitimacy to do so. One or the other must give way. It is fear of financial devastation that is set to win out in the immediate term. But this will unleash n more massive problems in its wake.
