Euro crisis looming again?

AFTER Greece obtained its third bailout last summer, Europe turned its attention to other crises. But it would be naive to conclude that the sovereign debt crisis is over. The Greek drama is still far from a happy ending; in Portugal and Spain, fragile left-wing governments may want to abandon austerity and roll back reforms; France has declared a state of economic emergency; Italy’s competitiveness keeps declining; the European Central Bank’s interventions are getting diminishing returns at increasing risk; and Germany has switched from complacency to angst mode, writes World Review Expert Professor Dr. Michael Wohlgemuth. In February, the European Commission published its latest economic projections for 2016-2017. Pierre Moscovici, the European Union’s commissioner for economic affairs, noted that the economy “is successfully weathering new challenges” due to the beneficial effects of “cheap oil, the euro rate and low interest rates.” Nevertheless, he mentioned “crosswinds” that could stall the positive trend: the slowdown in China, volatile oil prices, geopolitical tensions and “policy uncertainties inside Europe.” On this last point, Mr. Moscovici was curt. He mentioned neither the migration crisis nor the United Kingdom’s possible departure from the EU as major economic risks. Even more strangely, the full report cites extra government spending in response to terrorist threats and the refugee crisis as “positive surprises from public consumption.” In the econometric models that underlie the EU forecasts, these outlays count as “demand-driven” stimuli to the economy. This confidence seems misplaced. It is clear that most of the refugees will not be integrated into local labor markets and creating added value anytime soon. Meanwhile, if borders within the Schengen area are closed, the economic costs will be significant. A French think tank estimates the costs of freight and travel delays, along with reduced tourism, will amount to 110 billion euros over the next 10 years. The European Commission forecasts the euro area economy will expand at a rate of 1.7 percent this year and 1.9 percent in 2017 – slightly slower than the EU as a whole and barely half the rate of the world economy, which is projected to grow by 3.3 percent and 3.5 percent, respectively. Europe’s growth engines will be Poland, where gross domestic product is seen expanding by 3.5 percent in 2016 and 2017, along with Spain, the UK and the Netherlands, which are all expected to grow faster than 2 percent. Germany is seen below the EU average at 1.8 percent in both years. Greece is expected to do better than previously expected this year, posting a contraction of only 0.7 percent. The country should rebound in 2017 with solid GDP growth of 2.7 percent, its best performance in a decade, according to the EU forecasts. However, “policy uncertainties” abound in Greece. Brussels expects Athens to run budget deficits this year and next. The country’s debt-to-GDP ratio is expected to peak this year at 185 percent before declining to 182 percent in 2017. Capital controls remain in place to prevent bank runs and capital flight. Border controls have proved less effective, as thousands of refugees continue to brave the Aegean Sea to land on Greek islands. Meanwhile, Greece and its public creditors remain at odds over an assessment of bailout measures needed to unlock new financial aid. There is still no agreement on extremely unpopular pension cuts that have yet to win approval from lawmakers. Athens wants to conclude the review swiftly to start talks on debt relief. This is also what the International Monetary Fund (IMF) wants, because it sees no other way the country’s finances can be put on a sustainable basis. But the IMF is not convinced the Greeks have done enough to curb spending, and has delayed any decision on whether to participate in a third bailout until the second quarter. For a more in-depth look at this subject with scenarios looking to future outcomes, go to our sister site: Geopolitical Information Service. Sign in for 3 Free Reports or Subscribe.

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