By: Dr. Mike Campbell
Until recently, the EU was expecting that growth within the 17 member Eurozone to come in at 1.8% next year. The expectations have been revised sharply downwards to a growth figure of just 0.5%. The EU Commissioner for economic and monetary affairs, Oli Rehn, summed matters up in a bleak statement: "Growth has stalled in Europe and there is a risk of a new recession." Then again, anybody who follows the economic or general news was already well aware of that.
The world is suffering from a series of “chicken and egg” problems right now. The global financial crisis had its roots in debt (sub-prime debt, to be specific) which led to a loss of confidence in the sector as financial institutions had to write-down bad debt. The knock-on effect of that was that there was a shortage of funds in the markets for business expansion. Other sectors of industry, such as car manufacturing, found themselves in deep water and a general, deep, global recession ensued.
When the worst of the financial storm was over, attention turned to the issue of sovereign debt which, until recently, had been a cheap way for nations to fund a wide variety of projects. As a consequence, many nations (notably Japan, Italy and the US) had accrued huge public debts. The financial crisis and recession meant that national revenues from production, consumption and incomes all took a hit meaning that nations had less funds available to service their debts. Greece was just the tip of the iceberg.
Within the Eurozone, persistent fears that Greece or other peripheral Eurozone economies would default on their debts has starved confidence. The value of the Euro has been volatile and markets are exceptionally nervous. Unless growth returns to Europe, GDP figures will remain anaemic, putting pressure on nations to meet bond obligations – this will push up yields on bonds making the situation worse.
Greece has a new leader, a former vice president of the ECB and Italy is set to replace its prime minister. If new leadership in these countries make bold and credible strides to get their debts under control and restore confidence in markets that a default (or at least a disorderly default) is unlikely, action by the rest of the Eurozone and the wider EU may yet steady the ship.