THE EU
http://scotlandonsunday.scotsman.com/12702/-Bill-Jamieson-Social-meltdown.5049797.jp
Bill Jamieson: Social meltdown threatens Europe
Published Date: 08 March 2009
PLUNGING stock markets, collapsing banks, soaring unemployment: I cannot recall a period in more than 30 years in journalism when the flow of business and financial news has been as unrelentingly bleak as it is now.
We have entered a Dante's Inferno of economics. From America to Japan, Germany to Brazil, Ireland to Taiwan, the falls in industrial output, financial prices and confidence have been beyond the scale of anything we have seen since the Great Depression. This was the comparison that even a few months ago many recoiled from making for fear of hyperbole. Now it is frighteningly real, with markets in the midst of an epochal destruction of wealth.
From America last Friday came news that unemployment soared by 651,000 last month to 8.1%. It is the 14th consecutive month it has risen, and to the highest in 25 years. The latest losses bring the total from the start of the recession in December 2007 to 4.4 million – with 2.6 million of that coming in the last four months. On Wall Street the mood is black, with share prices being driven to fresh 12-year lows.
But it is not the United States – dire though the mood now is on Wall Street and Main Street – that concerns me most. The UK and mainland Europe look altogether more worrying. I do not think that in Britain we have yet grasped the depth and magnitude of the economic crisis that is unfolding and its implications for government spending and debt. And in continental Europe the signs of deepening recession are
everywhere evident.
A global slump in demand has battered the export-driven economies of France and Germany. Debt de-leveraging has struck at the heart of consumer credit-driven countries such as the UK, Ireland and Spain. Looking east, the crisis looks even more acute, with mounting worries over Western European bank exposure to countries such as Rumania, Hungary and the Ukraine.
The astonishing falls in industrial output portend serious social problems by themselves. Germany and France suffered output falls of 14% and 14.8% respectively between October and December, while Italy has suffered an 18% drop from recent peaks. But combined with severe corrections in highly geared housing markets and budget deficits rising at alarming speed, the EU finds itself in a deeper crisis than recent cosy – and ineffective – summit meetings have portrayed.
Problems in heartland EU economies are being compounded first by growing signs of stress elsewhere in the Eurozone and second by the growing possibility of a financial failure in some of the countries of the former Soviet Union. It is Europe that has the potential to turn the world's flickering lights into a black-out.
First, some facts and figures. Eurostat confirmed last week that Euro zone GDP plunged by 1.5% quarter-on-quarter in the final three months of 2008 – the third successive quarter of contraction.
The decline was widespread across the Eurozone. The most eye-watering was in Germany, the Eurozone's biggest economy, where GDP plummeted 2.1% quarter on quarter – the sharpest drop since unification in 1990.
Italy dived 1.8%, France 1.2%, and the Netherlands 1.9%. Germany's private sector shrank last month at its fastest rate in more than a decade while engineering orders posted their biggest decline in 50 years. The Ifo Institute's business climate index fell last month to its lowest level since re-unification and last month German firms applied to the authorities to put a staggering 700,000 workers on short time.
Europe's steel market is suffering its worst collapse in decades with EU output tumbling almost 46% year on year in January. Nor is the outlook any better in the services sector. It plumbed new lows last month with the services sector Purchasing Managers Index plunging at a record rate. Economists now expect Euro area GDP to decline by around 3% in 2009 and to be only flat overall in 2010.
In several countries – Spain, Greece and Ireland in particular – a collapse in the public finances now looms. In Spain, unemployment has now climbed to 3.3 million or 14.5% of the workforce. Ireland's budget deficit has already reached 9.5% of GDP, the highest in the Eurozone. Unemployment is at a 12-year high of 10.4% and is forecast to hit 12.3% this year.
Last week EU leaders meeting in Brussels for an emergency summit briskly slapped down pleas of help from Eastern Europe. And later last week came an extraordinary statement from Joaquin Almunia, the European Commissioner for Monetary Affairs, that the Eurozone has a way of bailing out its members if they face a crisis. Although no bail-out possibility existed under European Union laws, there was a solution that would avoid members having to seek help from the International Monetary Fund.
And what form might this solution take? "This solution exists", he insisted, "don't fear this for a moment. But by definition these things should not be explained in public."
That may be some comfort to those of a Brussels mindset. But to anyone in the real world this is to take public policy back to the medieval era. How is confidence in the European single currency to rest on a Baldrick-like cunning, secret plan? Has the cause of ever closer union come to this – a plan so sensitive it cannot be revealed in public?
If the stresses and strains within the Eurozone are worrying enough, consider what lies to the East. Hopes over the past decade of a linear rise in living standards and prosperity led to a surge in foreign currency borrowing. But these massive loans now look increasingly shaky as many former Soviet Union (FSU) currencies have plunged.
Latvia, whose economy is set to contract by 12% this year, and whose credit rating has been downgraded by Standard & Poor's to junk, is already in receipt of IMF aid. Another IMF support recipient is Hungary, burdened with a larger debt-to-GDP ratio than almost any other new EU member. A third is Ukraine whose GDP is set to contract by 10% this year. "No end in sight to political and economic chaos" was the crisp summation of The Economist.
Some countries such as Slovakia, Slovenia, the Czech Republic and Poland are holding up relatively well. But across the FSU some $400bn (£283bn) of short-term debt falls due for renewal or roll-over this year. The fear is that failure in one area could spark disaster elsewhere. Another is that there might be a stampede for the exits by foreign investors and particularly banks.
This appalling picture suggests that there is a risk over the next 12 to 18 months of serious political and social unrest in some of the countries to the east. The sense of anger and grievance is likely to be more keenly felt in those EU economies where populations have grown accustomed to standards of living that are relatively high compared with many countries in the FSU. One evident area of concern would be countries with a high and rising levels of youth unemployment.
For if, as the signs now suggest, we are in for a long, slow protracted recovery – one stretching out for five to seven years – the ingredients for explosive frustration are there.
That is why these astonishing falls in industrial output portend serious social problems well beyond anything Europe has experienced since the end of the war.
Bill Jamieson: Social meltdown threatens Europe
Published Date: 08 March 2009
PLUNGING stock markets, collapsing banks, soaring unemployment: I cannot recall a period in more than 30 years in journalism when the flow of business and financial news has been as unrelentingly bleak as it is now.
We have entered a Dante's Inferno of economics. From America to Japan, Germany to Brazil, Ireland to Taiwan, the falls in industrial output, financial prices and confidence have been beyond the scale of anything we have seen since the Great Depression. This was the comparison that even a few months ago many recoiled from making for fear of hyperbole. Now it is frighteningly real, with markets in the midst of an epochal destruction of wealth.
From America last Friday came news that unemployment soared by 651,000 last month to 8.1%. It is the 14th consecutive month it has risen, and to the highest in 25 years. The latest losses bring the total from the start of the recession in December 2007 to 4.4 million – with 2.6 million of that coming in the last four months. On Wall Street the mood is black, with share prices being driven to fresh 12-year lows.
But it is not the United States – dire though the mood now is on Wall Street and Main Street – that concerns me most. The UK and mainland Europe look altogether more worrying. I do not think that in Britain we have yet grasped the depth and magnitude of the economic crisis that is unfolding and its implications for government spending and debt. And in continental Europe the signs of deepening recession are
everywhere evident.
A global slump in demand has battered the export-driven economies of France and Germany. Debt de-leveraging has struck at the heart of consumer credit-driven countries such as the UK, Ireland and Spain. Looking east, the crisis looks even more acute, with mounting worries over Western European bank exposure to countries such as Rumania, Hungary and the Ukraine.
The astonishing falls in industrial output portend serious social problems by themselves. Germany and France suffered output falls of 14% and 14.8% respectively between October and December, while Italy has suffered an 18% drop from recent peaks. But combined with severe corrections in highly geared housing markets and budget deficits rising at alarming speed, the EU finds itself in a deeper crisis than recent cosy – and ineffective – summit meetings have portrayed.
Problems in heartland EU economies are being compounded first by growing signs of stress elsewhere in the Eurozone and second by the growing possibility of a financial failure in some of the countries of the former Soviet Union. It is Europe that has the potential to turn the world's flickering lights into a black-out.
First, some facts and figures. Eurostat confirmed last week that Euro zone GDP plunged by 1.5% quarter-on-quarter in the final three months of 2008 – the third successive quarter of contraction.
The decline was widespread across the Eurozone. The most eye-watering was in Germany, the Eurozone's biggest economy, where GDP plummeted 2.1% quarter on quarter – the sharpest drop since unification in 1990.
Italy dived 1.8%, France 1.2%, and the Netherlands 1.9%. Germany's private sector shrank last month at its fastest rate in more than a decade while engineering orders posted their biggest decline in 50 years. The Ifo Institute's business climate index fell last month to its lowest level since re-unification and last month German firms applied to the authorities to put a staggering 700,000 workers on short time.
Europe's steel market is suffering its worst collapse in decades with EU output tumbling almost 46% year on year in January. Nor is the outlook any better in the services sector. It plumbed new lows last month with the services sector Purchasing Managers Index plunging at a record rate. Economists now expect Euro area GDP to decline by around 3% in 2009 and to be only flat overall in 2010.
In several countries – Spain, Greece and Ireland in particular – a collapse in the public finances now looms. In Spain, unemployment has now climbed to 3.3 million or 14.5% of the workforce. Ireland's budget deficit has already reached 9.5% of GDP, the highest in the Eurozone. Unemployment is at a 12-year high of 10.4% and is forecast to hit 12.3% this year.
Last week EU leaders meeting in Brussels for an emergency summit briskly slapped down pleas of help from Eastern Europe. And later last week came an extraordinary statement from Joaquin Almunia, the European Commissioner for Monetary Affairs, that the Eurozone has a way of bailing out its members if they face a crisis. Although no bail-out possibility existed under European Union laws, there was a solution that would avoid members having to seek help from the International Monetary Fund.
And what form might this solution take? "This solution exists", he insisted, "don't fear this for a moment. But by definition these things should not be explained in public."
That may be some comfort to those of a Brussels mindset. But to anyone in the real world this is to take public policy back to the medieval era. How is confidence in the European single currency to rest on a Baldrick-like cunning, secret plan? Has the cause of ever closer union come to this – a plan so sensitive it cannot be revealed in public?
If the stresses and strains within the Eurozone are worrying enough, consider what lies to the East. Hopes over the past decade of a linear rise in living standards and prosperity led to a surge in foreign currency borrowing. But these massive loans now look increasingly shaky as many former Soviet Union (FSU) currencies have plunged.
Latvia, whose economy is set to contract by 12% this year, and whose credit rating has been downgraded by Standard & Poor's to junk, is already in receipt of IMF aid. Another IMF support recipient is Hungary, burdened with a larger debt-to-GDP ratio than almost any other new EU member. A third is Ukraine whose GDP is set to contract by 10% this year. "No end in sight to political and economic chaos" was the crisp summation of The Economist.
Some countries such as Slovakia, Slovenia, the Czech Republic and Poland are holding up relatively well. But across the FSU some $400bn (£283bn) of short-term debt falls due for renewal or roll-over this year. The fear is that failure in one area could spark disaster elsewhere. Another is that there might be a stampede for the exits by foreign investors and particularly banks.
This appalling picture suggests that there is a risk over the next 12 to 18 months of serious political and social unrest in some of the countries to the east. The sense of anger and grievance is likely to be more keenly felt in those EU economies where populations have grown accustomed to standards of living that are relatively high compared with many countries in the FSU. One evident area of concern would be countries with a high and rising levels of youth unemployment.
For if, as the signs now suggest, we are in for a long, slow protracted recovery – one stretching out for five to seven years – the ingredients for explosive frustration are there.
That is why these astonishing falls in industrial output portend serious social problems well beyond anything Europe has experienced since the end of the war.
posted by erc @ 1:55 pm
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