Grim outlook : can Europe avoid recession?

Source: The Malta Independent

A concerted effort this week by EU member states focused on how to stem the tide of recession. The negotiated solution seems to be in three parts: first¸ there is a 50 per cent haircut on the part of banks¸ then there is leverage of the European Financial Stability Facility (EFSF) to reach €1 trillion and finally there is to be an aggressive evaluation of banks’ immediate recapitalisation to meet any future shocks.

One may well ask if the medicine will cure the patient. It will not be so easy¸ says head of currency management at Insight Investment Management in London Dale Thomas: “The recession in Europe is going to happen¸ and if the European Central Bank (ECB) does what it should and aggressively eases policy¸ there should be a weaker euro next year.” But can anyone be complacent when considering Greece’s deteriorating finances¸ which economists fear reduced Europe’s room for manoeuvre in wrestling the contagion¸ which threatens to pitch the country into default¸ shake its banking system¸ infect Spain and Italy and tip the world economy into recession?

Equally cautious was Prime Minister Dr Gonzi on his return from an urgent meeting of heads of government in Brussels .He underlined the seriousness of the current situation in the eurozone when he addressed journalists in Brussels¸ saying that¸ so far¸ it does not appear that Maltese banks need any injection of fresh capital. He added that the country’s banking system is considered “very robust’ with exemplary strong balance sheets.

Not so lucky is Dexia¸ a Belgian bank that last month faced severe difficulties and had to be bailed out by its sovereign shareholders. Does this volatility bode well for medium-term growth prospects? The answer given by European Commission president José Manuel Barroso is that together we swim¸ divided we sink¸ and he warned the heads of government to toe the line. With courage and determination¸ the troika (the ECB¸ IMF and ESEF) is expected to reach agreement on boosting long-term growth. The recipe for growth includes enhancing measures: exploiting the single market¸ reducing the administrative burden and reducing the overall regulatory burden¸ among others.

Is this wishful thinking? How many times have we heard the mantra of killing bureaucracy (when Brussels itself wallows in it)? How can the group of 17 euro members¸ with disparate economic performances and varying rates of taxation¸ ever converge to prescribed Maastricht criteria? Studies reveal that a serious lack of central monitoring in Brussels has resulted in some countries straying from the requirements of the Stability and Growth Pact¸ thus undermining their own position and that of the eurozone.

Now that the crisis is eating into the credibility and survival chances of the single currency¸ everyone concurs that it is opportune to improve the monitoring of the pact. Again¸ Brussels wants to approve annual budgets before they are presented in respective parliaments. Sceptics feel that this is another example of shutting the stable door after the horse has bolted.

The situation at present is that laggards such as Greece and Ireland¸ etc.¸ are being rescued from bankruptcy by other members – who took their obligations more seriously – digging deep into their pockets. The latter concurred that the Stability Pact should be effectively enforced because it was beneficial to everyone that deficits stay below three per cent of GD