The International Monetary Fund forecasts slowing growth in Europe in 2012, against a background of weaker global activity, notably in the world’s most developed economies, also those with major imbalances.
The IMF’s latest World Economic Outlook report says the upswing earlier this year in the first quarter simply petered out in the second. The most recent indicators, it said, point to a general convergence toward low growth.
The deceleration was partly blamed on Japan’s tsunami shock hitting industrial production, and the effect on oil prices of the Arab Spring uprisings.
There is also the escalation of the euro zone crisis and its impact on internal demand being worse than predicted as loss of confidence spread.
Overall European economic activity will stay on the down-slope, the IMF said: from 2.4% growth in 2010, then 2.3% this year and 1.8% in 2012.
Not even Germany or Sweden will escape the slide. Their advantages of competitivity and better-balanced budgets during the 2010 recovery appeared to be flattening out.
In the countries under the most pressure from the markets, austerity measures will get harder, and unemployment will worsen. Portugal and Greece will stay in recession until the beginning of 2013.
Next year will see the Portuguese economy contract by 1.8% — the Greeks by 2%. Spain will see 1.1% growth, Germany 1.3%, which is half this year’s figure. Italy’s economy will hardly budge: forecast to grow by only 0.3%. Emergent economies Poland, Lithuania and Latvia will see theirs descend to around 3%.
In view of the report, to dissipate uncertainty the leaders of the euro zone countries face calls to synchronise their common vision of how to go on, and to clearly explain themselves. They are talking about reinforcing economic and fiscal governance within the monetary union and about some countries ceding some of their own control to a central euro area body.
Europe navigating stormy waters
Europe is in stormy waters, and to analyse the situation, we spoke to the head of the European Department of the International Monetary Fund (IMF), António Borges, who is in Brussels.
“The global economy is slowing, the financial markets are very volatile and the banking system is in a dangerous state. Is the world on the brink of a new recession?”
“I hope not, but we can’t exclude that scenario. There is a major economic slowdown in the United States and in Europe and when that happens there is always the chance of falling into recession. Our prediction is that the economy will continue to grow, even if it’s only a little. But we can’t exclude a more negative scenario than this.”
“Economically and financially, how is Europe today, compared with the Europe of 10 years ago?”
“The Europe of today is obviously much more prosperous and with more potential for growth. Fundamentally that is because of the very successful integration of a number of eastern European countries.”
“On the other hand you have countries like Greece and Portugal that are not growing…”
“Indeed, we have good examples of integration, but we have also other countries – especially on the periphery of Europe – where integration was less successful, where they didn’t take advantage of the opportunities presented by the creation of the euro zone. Those countries used their resources poorly, they built up a lot of debt in a way that didn’t allowed them to grow their economies and now they are in a crisis that they need to sort out.”
“Without economic growth it’s going to be difficult. The troika’s rescue programme hasn’t worked, on the contrary, Greece’s situation is getting worse. Were these the right measures? Is there anything you think you should have done differently?
“I wouldn’t have changed much. The programme that we worked out with Greece has a number of different elements, and a lot of them have been neglected, which is lamentable. We have been concentrated on the budget because it hasn’t been going well and therefore the budget is where all the attention and concerns have been focused. But it’s very important that the Greeks are able to become competitive again.”
“Do you believe that some European banks are at risk? Do they need to recapitalise as Christine Lagarde said recently?”
“Europe’s banks are going through difficulties because there is a widespread problem of confidence, not just in Europe but worldwide. That’s why in the IMF, our managing director, Christine Lagarde, has insisted that recapitalising banks is a priority, in order for them to have higher levels of capital and to calm the markets.
“But the stress tests conducted recently showed that they did have the capital…“
“The thing is that now - even if they didn’t have any problems in passing the tests before, they find themselves in a bad situation with the markets – because investors are moving away from the banks.”
“Finally, who is to blame for this crisis - governments or the financial system?”
“The responsibility has to be shared. In fact, talking about economic discipline in the euro area, it is clear that some of the biggest countries have not adhered to that discipline. In some cases, they went over the three percent of GDP borrowing limit in the Stability and Growth Pact.
“Then, the financial system is also responsible, because it tolerated big deviations of what should have been normal discipline,not asking borrowers to pay higher interest rates because of higher risk. For a long time, the market treated Portuguese and Greek government bonds almost the same as German bonds. Clearly that was the wrong thing to do.“