Highlights
– Consumer prices and spending drop in several euro zone nations, Spain and Ireland among worst hit economies
– Despite future actions of the European Central Bank, economic recoveries likely to take several years
– Rising unemployment and a sustained deflationary period could create an environment prone to civil unrest
A sustained decline in the cost of living coupled with cautious spending habits will force employers in Europe to implement further job cuts in the coming months, resulting in rising unemployment rates and enraged worker unions. Labor tensions are already apparent in countries such as France and Britain, where British workers carried out a series of strikes over the hiring of foreign workers while French laborers are resorting to taking factory bosses hostage in hopes of ensuring worker rights and wages.
Overall output in the euro zone fell dramatically in February 2009, compared to the same month in 2008. Consumer prices in Spain, Ireland, Portugal, Germany, and Luxembourg declined in the most recent quarter, while the overall rate of inflation for euro zone slowed in March 2009 to 0.6 percent, a record low (Source). If this drop in consumer prices and unemployment rates persist, euro zone economies could be faced with a consumer public holding out for lower prices, followed by lower revenues and subsequent cuts in workers or wages.
This scenario will intensify the pressure on the European Central Bank (ECB). While the United States Federal Reserve and the Bank of England have purchased bonds to pump money into their economies, initial signs of policy disagreement among the ECB central bankers lessen the probability of swift resolve to ward off further deflation risks. As the ECB mulls options of lowering interest rates or purchasing government securities, inevitable near-term job cuts will likely result in more frequent and large-scale labor demonstrations in euro zone nations in the near to medium-term.
Spain, Ireland Economies Face Biggest Shocks
Economic indicators in Spain and Ireland portray two economies severely impacted by the global credit crisis. Spain’s unemployment rate rose to 17 percent in the first quarter of 2009, which could soon reach 20 percent with a continued fall in the country’s service sector and falling tourism levels (Source). Spain also saw a drop in food prices, as well as declines in stable sectors such as pharmaceuticals, medical treatments, and clothing.
Ireland’s unemployment rate climbed to 11 percent in March, which has caused retail sales to fall by nearly 20 percent (Source). With Ireland’s gross domestic product (GDP) projected to shrink by 8 percent and the unemployment rate likely to reach 15 percent by the end of year, a period of deflation threatens to delay Ireland’s road to recovery for several years.
Outlook
After the ECB delayed a decision on new measures to counter the drop in prices earlier this month, it is likely to cut the benchmark rate an additional quarter-percentage-point at the next meeting on May 7.
The latest economic figures point to a sustained drop in euro zone industrial output as a result of sagging global demand for euro exports, with record numbers of people claiming unemployment. In nations like Spain and Ireland, firms will scramble to implement freezes in pay raises and cuts in wages to ward off bankruptcy. But as the recession deepens, some firms will go under, leading to even less spending, lower demand and a sharper decline in prices. Consequently, escalating cynicism among laborers is likely to create an environment in Europe vulnerable for large-scale unrest in the near to medium-term.