Tuesday, August 14, 2012

EU moves closer to recession

The EU Statistical Office, Eurostat, reports that in the second quarter of this year GDP shrank 0.2% compared to the previous quarters. The decline was both in the Eurozone and the 27 member European union.

After a disappointing zero per cent growth in the first quarter, Europe edged closer to recession as the GDP actually shrank this quarter. The decline in the Eurozone itself was 0.4%, greater than in the larger Union. Given the zero growth in the first quarter and the decline in output in the second quarter the EU is edging perilously close to a recession. A recession is usually defined as two consecutive quarters of declining output.
The dismal results are in part due to the debt crisis that has required bailouts for several countries. Greece, Ireland, Portugal and Spanish banks have all received aid. Italy too faces a debt crisis and increasing borrowing costs. To tackle debt many countries have imposed severe cuts in government spending and slashed wages and pensions. The resulting decline in demand has often lowered economic output and made the debt situation even worse by sending economies into recession. Greece is among the worst hit by these policies.
The Greek economy shrank by 6.2% in the second quarter. The Greek government is scheduled to make even more cuts so that the decline will no doubt continue. The unemployment rate in Greece has climbed to 23.1% but among those under 25 the rate is a huge 55 per cent. Given this level of unemployment further cuts will face fierce public resistance. The coalition government has asked for a longer time period to achieve debt reductions. Greece has already experienced five years of depression.
The EU is falling behind the U.S. and Asian economies in GDP growth. The United States grew by 2.2% this quarter. In Asia even the Japanese economy grew by 3.6%. Within Europe Germany has still managed to grow during the crisis although only at a very slow rate. In the second quarter German GDP grew by 0.3%. Although this is above the 0.2% forecast it is still far from robust growth! Exports have been growing faster than imports and both public and private spending have increased. Analyst Annalisa Piazza said:
“The German economy remains relatively resilient and the expected effects of the euro zone debt crisis remained limited.”
France posted zero GDP growth. French president Hollande has opted to postpone austerity measures and try to promote growth but so far the economy is still sluggish. The French Finance Minister predicted 0.3% growth for 2012.
Other countries in the EU also had shrinking economies. Portugal had a 1.2% decline, Spain 0.4% and even Finland in northern Europe had a one per cent decline. Italy also faces problems.as its GDP shrank 0.7% and its borrowing costs are rising.
The debt crisis in Europe is far from over as depression threatens the entire EU as a group.. Effects of the crisis are felt globally as trading partners face falling demand from the EU.

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