Hard times

The atmosphere in the corridors of the European Commission has changed. The instability of the financial markets has been transformed into economic stagnation or into a full-blown crisis and now the “effective and coordinated” measures long called for are needed. So Joaquin Almunia, European Commissioner for Monetary Affairs, in presenting the Economic Forecasts 2008-2010 for the euro zone and for the EU27, did not mince words in speaking of a “precarious situation” and of “considerable uncertainties for the future”.Generalized recession. The document prepared by the Executive was examined by Ecofin – the Economic and Financial Affairs Council – at its meeting on 4 November. At the same meeting the economics and financial ministers of member states discussed the proposals that the European Union should take to the international summit in Washington on 15 November, when the EU together with the USA, Japan, Russia, China, India and other “giants” of the world economy will analyse the diseases that are now afflicting the world economy and seek common solutions. Almunia placed the emphasis not so much on the numbers as on the effects of a “generalized recession” that is having a negative impact on industrial production, trade, public budgets and the consumption of European families. In 2008 EU economic growth is forecast to be 1.4%, i.e. half of that of last year; a further deceleration is set to be confirmed for 2009 (0.2%), before the economy starts to “progressively recover” in 2010. In the 15 States that have adopted the single currency, the downturn is even more marked: 1.2% in 2008; 0.1% in 2009; 0.9% in the following year. Economy stagnant. Unemployment growing. Almunia pointed out, that at the European and international level, measures are being taken to support the economy, but the results “cannot be gauged for the time being”. He also predicted “a growth of the unemployment rate of approximately 1%” in the medium term, while inflation ought to remain under control, “also thanks to the contraction of oil prices” and the measures adopted by Central Banks. The “sombre horizon” described by Commissioner Almunia regards Europe but does not exclude the other global players. “Hitherto – added Almunia – the emerging economies have resisted better than those of the EU and the USA, but they too are unlikely to emerge unscathed from the crisis”. Again according to the experts in Brussels, the gross domestic product of the USA is set to reach 1.5% in the current year, before dropping to -0.5% in the twelve following months and recovering to 1% in 2010 (assuming no change in policy). However, a global view of the situation suggests we are heading for a significant slowdown: the average 5% growth rates in the world for the period 2004-2007 will decline to 3.7% in 2008 and 2.2% in 2009. The effects country by country. According to the experts of the Commission, “economic prospects will not be very encouraging for the EU” in the medium term. And while a freezing of prices can be expected, public deficits are likely to worsen and unemployment to grow in various countries. The crisis of the real economy seems to be having different consequences in the various states of the EU. In Germany GDP, which was 2.5% in 2007, is estimated to fall to 1.7% this year, while next year it is set to register zero growth (0%). A significant downturn is also predicted for France, but likely to be even worse in the UK (from 3% GDP in 2007 to -1% in 2009). The estimate for Italy is zero growth both this year and next year. Though in a generalized situation of economic contraction, more dynamic national situations are not lacking, such as Finland, the Netherlands and Greece. As for Poland, the GDP figure for 2007 was 6.6%: this year it will fall to 5.4% and to 3.8% in 2009. Good performances are predicted for Slovenia and Slovakia, while a real shock lies in store for some countries: for example Ireland’s GDP is predicted to plummet from 6.0% in 2007 to below zero rates in 2008 and 2009; the prediction for Latvia is even worse: from 10.3% in 2007 to -2.7% in 2010. A certified recession has also been confirmed for Spain and for Estonia, while the EU has already had to go to the rescue of ailing Hungary in recent days. EU counter-measures. The Spanish Commissioner tried however to look ahead and warned that “coordinated action is needed at the EU level to support the real economy, similar to that conducted on the financial side”. Almunia underlined the outline proposals made by the Commission last week “to stimulate investments and support jobs and demand”: a real “plan” will be presented on 26 November and, as the President of the Commission José Manuel Barroso explained, “will also comprise short term measures”. The Commission would like to allocate “further funds and is thinking of new uses for existing funds”; it also intends to “augment the capital placed at the disposal of the European Investment Bank”, the EU’s credit institute. “The bank has already put together a package of loans worth 30 billion euros to come to the aid of small businesses that are now having difficulty in obtaining credit”.