Skip to main content

Sovereign debt cancer threatens European and global economies - UN

Geneva/Brussels
Fiscal austerity programmes in force across Europe and the sovereign debt crisis that erupted in Greece last May — which subsequently spread, first to Ireland and Portugal, then to Spain and Italy — have shaken the European economy and raise the chances of another global recession, says the United Nations’ World Economic Situation and Prospects 2012 (WESP), out today. The UN economic report predicts that growth in the European Union is expected to be only 0.7 per cent in 2012, substantially lower than the 1.6 per cent growth registered in 2011.

The UN report says that a combination of fiscal austerity and sovereign debt have sapped the confidence of both producers and consumers, and weakened the already delicate banking system. In combination with the extremely low momentum going into 2012, GDP growth is expected to reach only 1.7 per cent by 2013 (see table at the end of the release).

UN economists project that 2012 will be a make-or-break year in terms of proceeding with slow economic recovery or falling back into recession – a risk that has increased dramatically since the onset of the debt crisis. In such a downside scenario, the UN estimates, the EU economy might contract by 1.6 per cent in 2012, with most countries, including France, Germany, and the UK, entering into recession.

“Failure of policymakers, especially those in Europe and the United States, to address the jobs crisis and prevent sovereign debt distress and financial sector fragility from escalating, poses the most acute risk for the global economy in the outlook for 2012-2013,” says the report. “The developed economies are on the brink of a downward spiral enacted by four weaknesses that mutually reinforce each other: sovereign debt distress, fragile banking sectors, weak aggregate demand (associated with high unemployment and fiscal austerity measures) and policy paralysis caused by political gridlock and institutional deficiencies. All of these weaknesses are already present, but a further worsening of one of them could set off a vicious circle leading to severe financial turmoil and an economic downturn.”

Indicators of economic sentiment started to decline in March 2011, but it was not until September that measures of economic activity followed suit. Comparing monthly measures of industrial production and industrial confidence with quarterly GDP growth rates, the pattern is worryingly similar to the period prior to the Great Recession of 2008-2009 and indicates that the brunt of the slowdown will be felt in the final quarter of 2011 and the beginning of 2012.

The 2008-9 recession has left a bitter legacy: greatly elevated levels of budget deficits and debt with tremendous pressure for budget consolidation; high levels of unemployment, which have hardly budged since the onset of the recovery and threaten to become entrenched.
 
Sources of growth
WESP reports that the recovery to date has been heavily dependent on external demand from the emerging markets and the remnants of fiscal and monetary stimuli enacted during the recession. Domestic demand briefly played a more prominent role in the first quarter of 2011. Private consumption expenditure was supported by greatly improved confidence and good labour market performance in some countries, while fixed investment excluding construction was boosted by strong external demand coupled with increasing capacity utilization. But this brief upturn ended in the second quarter, as oil prices spiked, the earthquake and the tsunami that struck Japan disrupted global manufacturing supply lines, demand from emerging markets began to decelerate and the sovereign debt crisis exploded. 
In its 2012 outlook, the UN predicts that consumption will remain subdued, constrained by continuing fiscal consolidation measures, less certain labour market prospects, uncertainty from the debt crisis and tightening bank-lending conditions.  In the crisis-affected countries, consumption is expected to continue to contract. Investment spending will also struggle, impacted by decelerating external demand coupled with deteriorating financing conditions and declining capacity utilization and, more generally, by increasing uncertainty.
 
Labour markets  
Labour markets in the euro area overall have shown little change since the end of the recession, with unemployment remaining near 10 per cent in the euro area since September 2009. However, this generality disguises major differences between countries.  Austria, Belgium and Germany, for instance, have seen visible improvements, while others, including all countries facing sovereign debt distress experienced sharp increases in unemployment. Given the subdued outlook, unemployment is expected to remain near current levels for the EU-15, with the crisis countries deteriorating further, or at best, remaining at elevated levels.

The prolonged period of low growth and resulting high unemployment in many regional economies risks an increased rate of long-term unemployment in the region, making it far more difficult to produce new jobs or improve output in the near future.
 
Fiscal austerity grips the region
WESP says that the euro area fiscal deficit increased substantially during the recession, from 2.1 per cent of GDP in 2008 to 6.4 per cent in 2009, and dipped only slightly, to 6.2 per cent, in 2010. All members of the euro area, except Finland, Luxembourg and new member Estonia, registered deficits greater than 3 per cent of GDP in both 2009 and 2010, which is the limit enshrined in the Stability and Growth Pact (SGP).  Most members of the euro area are tightening their budgets, with a minimum requirement of an improvement in budget deficits of 0.5 per cent of GDP per annum. The annual consolidations, however, are much higher in the crisis affected countries and may need to be strengthened if there are shortfalls in revenues. After its deficit rose sharply, the United Kingdom of Great Britain and Northern Ireland also came under pressure and is pursuing a dramatic consolidation programme.
 
The recovery will slow for new EU members in 2012

Against the backdrop of an anticipated slowdown in 2012 and little impetus to growth provided by euro area exports, the nature and speed of the recovery in domestic demand will determine the short-term macroeconomic prospects for the new EU member States. Furthermore, domestic demand is unlikely to be sufficient to bolster growth in 2012. Growth of the aggregate GDP of the new EU members, which accelerated from 2.3 per cent in 2010 to 2.9 per cent in 2011, is therefore expected to slow to 2.6 per cent in 2012 before strengthening to 3.1 per cent in 2013. However, forecast growth remains significantly below pre-crisis levels.

Poland, the largest and least export-dependent economy in the new EU, maintained its strong economic momentum in 2011, with 4 per cent GDP growth largely supported by domestic demand. For the smaller economies of Central Europe, growth in 2011 was predominantly driven by exports, especially in the automotive and electronic sectors. The Baltic States have registered the highest growth rates, but they are bouncing back from deep recessions, and income remains significantly below pre-crisis levels. In the Czech Republic and in the Baltic countries, domestic demand recovered somewhat in 2011, but it remains depressed in Bulgaria, Hungary and Romania. The appreciation of the Swiss franc placed strong pressure on households and businesses in Hungary and Poland, which had borrowed heavily in that currency. Most of these economies are expected to grow by only 2 to 3 per cent in 2012.

World Economic Situation and Prospects is produced at the beginning of each year by the UN Department of Economic and Social Affairs (UN DESA), the United Nations Conference for Trade and Development (UNCTAD) and the five United Nations regional commissions.

http://www.un.org/en/development/desa/policy/wesp/index.shtml\

If you wish to subscribe to the UNECE Weekly newsletter, please send an email to:  [email protected]

United Nations Economic Commission for Europe

Information Unit

Tel.: +41 (0) 22 917 12 34

Email: [email protected]

Reproduction is permitted provided that the source is acknowledged.