Highlights
– Commission predicts 4 percent contraction for EU economy
– Unemployment increases into 2010
– Stimulus packages, toxic debt, interest rate cuts focus of long-term recovery plan
The European Union (EU) will experience a sustained drop in employment and manufacturing output through the end of 2010, resulting in a far worse than anticipated European recession. The EU’s biggest economies, Germany, Italy, and the United Kingdom (UK), economies face probable contractions by 5.3, 4.4, and 3.8 percent respectively. Countries in Eastern Europe including Poland, Slovakia, Romania, Bulgaria, and the Czech Republic are set to experience substantial downturns in the next couple of years as well.
The annual European Commission spring forecast reinforces the grim outlook for 2009 and 2010. The commission predicts both the Euro Zone and the EU will contract by 4 percent through 2009, more than double the commission’s January 2009 prediction of 1.9 percent. The commission also predicted the 16-nation Euro Zone will shrink by a nominal 0.1 percent in 2010 (Source).
As previously stated, we assess escalating worker dissatisfaction will increase the probability of future civil unrest in the EU. Approval ratings and public confidence for current administrations are also at risk, creating a prime environment for extreme opposition parties to generate support. While banks and governments across the EU have engaged in a number of bailout actions, further government action targeting the toxic assets held by European banks will determine the prospect of a swift economic recovery beyond 2010.
Public Deficits
A total of 21 of 27 EU member nations are projected to exceed their limit of 3 percent public spending to GDP set by the EU’s Stability and Growth Pact. Notable projected public deficits (% of GDP) through 2009 include (Source):
• Ireland: 12 percent
• UK: 11.5 percent
• Spain: 8.6 percent
• France: 6.6 percent
• Portugal: 6.5 percent
• Greece: 5.1 percent
• Italy: 4.5 percent
• Germany: 3.9 percent
• Netherlands: 3.4 percent
In the whole 27-nation EU, the budget deficit is to more than double to 6 percent this year, and rise further to 7.3 percent in 2010, reflecting both the slowdown and the public spending measures taken to support the economy.
Unemployment Rates
Across the EU, unemployment figures are raising doubts of a swift economic recovery in 2010. Notable projected unemployment rates through 2009 include (Source):
• Spain: 17.3 percent
• Lithuania: 13.8 percent
• Latvia: 15.7 percent
• Ireland: 13.3 percent
• France: 9.6 percent
• Italy: 8.8 percent
• Sweden: 8.4
• UK: 8.2 percent
Such high figures represent a serious threat to political stability and social order in the coming months. We foresee sizable street protests in major cities across Europe and increased appeal to extremist groups advocating radical solutions to economic and social issues.
Positive Signs, Long-term Recovery
Recent data in the euro zone suggest Europe’s economy may be past the worst part of the recession. European investor confidence rose for a second month in May and an index of European manufacturing rose to a six-month high (Source).
Still, economic recovery will likely take several years. The looming rise in unemployment will force Europe’s manufacturing and tourism sectors through a sustained downsizing period in the coming months. We expect an increased number of protests and labor disputes to arise following corporate efforts to streamline operations and lower labor costs.