Austerity reigns over euro zone as crisis deepens
Europe’s leaders braced their nations for a turbulent year, with their beleaguered economies facing a threat on two fronts: widening deficits that force more borrowing but increasing austerity measures that put growth further out of reach.business Updated: Jan 02, 2012 20:53 IST
Europe’s leaders braced their nations for a turbulent year, with their beleaguered economies facing a threat on two fronts: widening deficits that force more borrowing but increasing austerity measures that put growth further out of reach.
Saying that Europe was facing its “harshest test in decades,” German Chancellor Angela Merkel warned on New Year’s Eve that “next year will no doubt be more difficult than 2011.”
Her message was echoed in Italy, France and Greece, the epicentre of the debt crisis, where Prime Minister Lucas Papademos asked for resolve in seeing reforms through, “so that the sacrifices we have made up to now won’t be in vain.”
While the economic picture in the US has brightened recently with more upbeat employment figures, Europe remains mired in a slump. Most economists are forecasting a recession for 2012, which will heighten the pressure governments and financial institutions across the Continent are seeing.
Adding to the gloomy outlook is the prospect of a downgrade in France’s credit rating, a move that analysts say could happen early and have wide-ranging consequences on efforts to stabilise Europe’s finances.
Despite criticism from many economists, though, most European governments are sticking to austerity plans.
This cycle was evident on Friday, when Spain surprised observers by announcing a larger-than-expected budget gap for 2011 even as the government laid out plans to increase property and income taxes in 2012.
Indeed, even in Greece, the cycle of spending cuts, tax increases and contraction has not resulted in a course correction, and the same path now lies in store for much larger economies such as those of Italy and Spain.
“Every government in Europe with the exception of Germany is bending over backwards to prove to the market that they won’t hesitate to do what it takes,” said Charles Wyplosz, a professor of economics at the Graduate Institute of Geneva. “We’re going straight into a wall with this kind of policy.” In fact, economists and strategists have been ratcheting down their growth expectations.
“Europe is likely to have a meaningful recession in 2012,” said Tobias Levkovich, Citigroup’s chief equity strategist. He expects Europe to remain a key worry for investors worldwide in 2012.
Neville Hill, head of European economics at Credit Suisse, expects GDP in the euro zone to shrink by 0.5% in 2012, with the worst of the pain being felt in the first quarter.