Economic Recovery Watch 14 September 2009


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Economic Recovery Watch 14 September 2009

  2. 2. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 14/09/2009 To view full articles click on hyperlinks. “Watchtower”: Tobin 2.0? Foreword by CES Head of Research The European Socialists and Democrats have been demanding it for some time already, for tradeunionists and anti-globalists it has become a credo already in the 1990s, ATTAC is built on it, and now theGerman Social Democrats have officially joined the chorus: A global tax on speculative internationalfinancial transactions, in order to curb the “binge drinking” on the financial markets, as German financeminister Steinbrück put it. And, in order to kill two birds with a stone, also to help fill the gaping holes inpublic budgets around the globe. A kind of Tobin Tax 2.0. Is it feasible, and if yes, would it be desirable? With so far rather poor success in profiting from the global financial and economic crisis, it isunderstandable that Europe’s Left is groping for an issue to rally around. And never mind that James Tobinhas disowned what he labels a misuse of his idea long ago. The real problem with this kind of tax is that iteither works in seriously reducing the volume of speculation – then the global economy will suffer in theworst possible moment: precisely in the tricky phase at the beginning of the recovery. Or it doesn’t work –then it’s superfluous. Besides, the question of who would raise the tax, provided it is truly global, remainscrucial. The United Nations? God help us! A new international bureaucracy? Good luck! Or should wemaybe just introduce it on the EU level first, thereby even providing new funds for the Union, and hopethat everybody else will soon follow? Of course, that would just push speculation out of the EU andelsewhere. Our financial hubs like London and Frankfurt would surely suffer, along with the political cloutthat goes with having such places. But the core of the issue is and remains: should speculation as such be curbed at all? More importantly,can a fairly fast and sustainable recovery be achieved at all without financial speculation? The answer is no,and it wasn’t speculation as such that caused the crisis but lack of oversight, sloppy regulation and toomuch (and wrong) state interference in the credit business. To simply reduce speculation won’t help toprevent another crisis. Better regulation will. And the exit strategy from our huge deficits will have to use ablend of carefully raising some existing taxes, budgetary rigour and, above all, new tax revenue throughnew economic growth. If all that is so, and Tobin 2.0 is feasible only at tremendous economic and political cost, and thereforenot desirable, why does a sizeable portion of Europe’s political spectrum advocate it so passionately? Theanswer is simple: Window-dressing has always been part of the political toolbox. And what looks morepopular at first sight than the proposal of a tax that only seems to punish the “evil speculators” in the banksthat caused all the trouble (and then got bailed out for free), leaves “the people” untouched, and evenserves a good purpose? Well, if it’s only the looks that count in this matter, then the task of EPP politiciansshould be to tell the truth about Tobin 2.0, expose its fallacies, and thereby spoil its looks a little bit.
  3. 3. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 14/09/2009 To view full articles click on hyperlinks.EU MEMBER STATESAustriaAustrias Hypo Alpe Adria Bank expects to post a full-year net loss due to the effects of the financialcrisis and rising risk provisions. Hypo, which reported a first-half loss of 162 million euros, said soaringrisk costs hurt results and that it will undertake a major restructuring program in the second half of theyear. The good news is that according to a study by German Deka Bank, Austria has escaped the worstof the world economic and financial crisis. The bank compared the difference between the strongestquarterly economic growth before the onset of recession and the weakest quarter after its start in 31countries. The bank said the difference in Austria was 4.4 per cent of gross domestic product (GDP).Even though Austrian steel giant Voestalpine ends short-time work at the Linz plant, which has beenintroduced due to the decline in orders by nearly 50 per cent in the first half of 2009, its spokesmanremains cautious in his statements: "The fact that short working hours are being abandoned for nowat our largest site should not be understood as an indication that a sustained upturn in the economy isassured. There remains a risk of another economic slump over the course of 2010."BelgiumBelgium ranked as the 18th most competitive economy in the world according to a recent study of theWorld Economic Forum. The Belgian economy came ahead of France and Germany, the annualpublication underscored the quality of the Belgian workforce and the business-friendly environmentthat convinced many multinationals to move their European headquarters to the country.Nonetheless, the study recognized the limits stemming from a rigid labour market, governmentinstability and cumbersome bureaucracy.BulgariaThe mission of the International Monetary Fund is in Sofia for a regular review of Bulgaria’s fiscalsituation. Finance Minister Djankov said that at the moment there is "no rush" to seek emergencyfunding from the IMF, even though the worst effects of the economic crisis are still to hit the Bulgarianeconomy this autumn. However, further spending cuts should see the state balance its budget in 2009.Populist spending by the previous Socialist government raised concerns that Bulgarias public accountswould slip into deficit for the first time in years. But Bulgarias budget deficit shrank to 105 million levin August from 565 million lev in July following a 15 per cent cut in government spending, the largestof any European Union member state. The new government also announced a freeze in governmentwages and pensions until the summer of 2010. At the end of August, Bulgarias government approveda mid-term fiscal policy document, which brings together the countrys key macroeconomic forecastsfor 2010-2013. The document forecasts the contraction of Bulgarias economy to slow down to 2 percent next year from a 6.3 per cent shrinking in 2009. Unemployment will increase and wage growthwill be lower than production efficiency. Already this year, the Bulgarian State Railways EAD Group
  4. 4. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 14/09/2009 To view full articles click on hyperlinks.plans to lay off 1,330 of its employees as of 1 October, and when the new timetable is released on 12December, the staff will be cut by another 670 people bringing total layoffs to 2,000. Signs ofeconomic animation may be expected in 2011, with exports speeding up the recovery. Given a healthyrecovery of the economy, Djankov said plans for a 2 per cent cut in the Value Added Tax (VAT) may beimplemented in 2011, to be followed by another 2 per cent decrease before the term of thegovernment expires. He confirmed government plans to apply in November to join the exchange-ratemechanism, the European Unions two-year currency stability test before the country can drop the levand adopt the euro.CyprusSummer in Cyprus was marked by a decline in tourism turnover. The 9.5 per cent drop in Cyprustourist arrivals in the second quarter has been reflected in figures for accommodation services(hotels), where the Statistical Service reported a decline in turnover of 12.6 per cent over the yearearlier in the period April-June 2009. The broader sector of accommodation and food service activities(hotels and restaurants) recorded a milder decrease of 5.5 per cent, thanks mainly to a 1 per centincrease in the sector of food and beverage services. The Statistical Service also reported a turnoverdecrease of 28.2 per cent in the sector of travel agencies and a decrease of 11.7 per cent forinformation services. A fall of 13.9 per cent was recorded on the sector of computer programming andrelated activities. The number of registered unemployed recorded another sharp increase in August,rising by 6,987 over August 2008 to 17,788 people. This was 64.7 per cent higher than in August 2008,and marks the highest year-on-year increase so far this year. The biggest increase in terms of numberswas in the construction sector.Czech RepublicIn July 2009 exports and imports at current prices fell by 17.9 per cent and 21.3 per cent respectively,compared with July 2008. However, the Czech Prime Minister Fischer said that the growth of theCzech economy might be higher than expected. He said that in 2010, the Czech economy might growby about 0.5 per cent and that in the following years, Czechs could see “the light at the end of thetunnel”. Perhaps most seriously the economic crisis has hit Czech farmers and agriculture firms. Bothsmall farmers and larger companies often owe money to their suppliers and are unable to pay theircredits. Fruit growers report that their revenues will be lower by tens of millions of crowns this year.Market prices of wheat are about 50 per cent lower than last year and farmers keep most of thisyear’s harvest in the barns. Agriculture firms also have to sell milk at prices lower than productioncosts.DenmarkThe Danish central bank has warned the government that given the rapid deterioration in publicfinances, it would be imprudent to consider any additional fiscal easing in addition to that alreadyagreed. Highlighting the countrys deteriorating international competitiveness, the bank also urgedreforms aimed at permanently increasing the labour supply. But with unemployment now rising, far-reaching labour market reforms will remain elusive. Instead, the government wants to
  5. 5. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 14/09/2009 To view full articles click on hyperlinks.cut taxes and raise spending to alleviate the effects of the downturn. The Danish government has sofar employed a range of anti-crisis measures. These include tax cuts—personal income taxes havebeen lowered, with the government recently securing parliamentary agreement for a further phasedreduction in 2010-11—and support for the banking sector, including state guarantees for lending andthe provision of up to 63 billion Danish crowns (US$11.5bn) to recapitalise the financial system.EstoniaEstonia’s State controller made an offer to the government to adopt a credit limit for publicuniversities and high schools taking large loans or credits, which are now having a negativeinfluence on the overall budget deficit. At the same time, pensions as well as wages of medicalprofessionals and teachers are at risk of further cuts. Meanwhile, the increase in the maximum ratein parental benefits causes puzzlement among opponents of the plan. This means that next year’sstate budget will have to carry an extra burden of approximately 50 million kroons (3.2 million euros).Despite the economic crisis, Estonia plans to continue preparing for an extensive weapons purchaseprogram for its defense requirements. Over the next ten years the country will spend 60 billion kroons(3.8 billion euros) on developing its defence forces.FinlandThe recession will ease off during the remainder of the year, but great uncertainty will continue toprevail in the economy, predict both Nordea Bank and the Labour Institute for Economic Research(PT). Based on the Nordea and PT estimates, Finland’s economic prospects have slightly improvedfrom the early summer. According to Nordea and PT, despite the structural crisis afflicting the forestryindustry, Finland’s outlook is improving with the picking up of the world economy. Nordea and PT alsoagree that unemployment will continue to increase in the coming year. The recession has alreadycaused reductions to paying bonuses and other extras to worthwhile workers.FranceFrench President Nicolas Sarkozy assured on 5 September that he will continue his fight againstunjustified remuneration of bankers at the next G20 on 24 September. However, many analysts seelittle chance of France and Germany to achieve a general deal at the next meeting, partly due to USand UK resistance. On the environmental side however, France will next year become the largesteconomy to levy a carbon tax, but will introduce it at a low starting rate to try to pre-empt a backlashfrom a heavily taxed public. President Nicolas Sarkozy hopes the move will underscore Francesenvironmental credentials ahead of Decembers Copenhagen conference intended to draw up aninternational agreement for emission reductions after 2012.GermanyMixed German data highlighted concerns over a potentially fragile recovery in Europes biggesteconomy. The good news was that the German trade surplus and exports posted gains in July asglobal economic activity began to rebound from a historic slump. The investor confidence figureknown as the ZEW showed a massive boost in sentiment in August. The figure beat expectations and
  6. 6. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 14/09/2009 To view full articles click on up at its highest level in more than three years. Germany is emerging from its worst recession in sixdecades and while the outlook for 2009 is brighter, it becomes more uncertain next year whengovernment stimulus programmes are set to taper off. Unemployment will probably rise and Germanfirms could also face a credit crunch that could curtail investment just as demand picks up. In anattempt to avoid a credit crunch, Germanys economics ministry is drawing up a raft of specialmeasures with the Bundesbank. Axel Weber, Bundesbank chief and a key figure at the EuropeanCentral Bank, said that the economy remains fragile and fundamental problems in the credit systemhad not been resolved. G20 policymakers promised to keep economic support packages in place untilrecovery is certain. Germany put forward proposals to discourage banks from paying excessivebonuses that promoted risk-taking behavior. Germany opposes any plans by the G20 to limit the sizeof banks to avoid individual institutions wielding too much influence in future and posing a risk.GreeceGreece suffered its first contraction in 16 years in the three months to June due to a slump ininvestment and weaker private consumption. In the second quarter, Greece’s economy managed toexpand slightly. But Greece faces the risk of extended slow growth if it fails to adopt structuralmeasures to boost competitiveness and correct its fiscal imbalances. There is no doubt that the mostworrisome aspect of the present economic slowdown is the widening of the general governmentdeficit to a projected 6 per cent of GDP or more at the end of June. The biggest challenge for the newgovernment (early elections to be held on 4 October) will be to achieve fiscal consolidation withouthurting economic growth. This means the key to growth is mainly private consumption andinvestment spending. Private consumption is a big question mark because lending is likely to pick upslightly but salaries and wages are unlikely to rise as much as in 2009 and 2008. Moreover, the rise inunemployment, the cuts in overtime work and the likelihood of flexible work hours being introducedin many private enterprises will definitely contain spending. On the other hand, the apparent rise intax evasion helps consumption.HungaryThe 2010 budget draft is to be submitted to Parliament on 11 September. Governor of National Bankof Hungary, Andras Simor, said the central bank considers it important that the 2010 budget draftensures the 3.8 per cent-of-GDP deficit target is met. Simor acknowledged that a lower base ratewould be necessary, but said the central bank also had to take into account financial stability and thefinancing of the countrys debt. Hungary wants to extend the availability of the remaining twotranches of the IMF standby credit by six to nine months from the original March 2010 deadline, headded. An IMF delegation held discussions with the Hungarian authorities during 26 August –7 September as part of a third review of the country’s economic performance. According to thedelegation, Hungary’s economic outlook has stabilised since the last review. A real GDP is projectedto contract by 6.7 per cent in 2009 and by a further 0.9 per cent in 2010. The current account deficit isnarrowing sharply to 2.9 per cent of GDP this year. Inflation is expected to rise temporarily to about6 per cent by end-2009, reflecting the increase in the VAT rate and excise taxes, and then to fall tobelow 3 per cent by mid-2010, as the effects of the indirect taxes fade.
  7. 7. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 14/09/2009 To view full articles click on hyperlinks.IrelandIreland looks at ways to come out of the crisis that undermined the run of the then-Celtic tiger.Ireland’s bad bank, which plans to buy soured commercial property loans from the Irish lenders, willbe a catalyst to reshape Dublin banking, leading to mergers, possible closures and a reduction incompetition in the industry. Analysts say a larger shake-up will take place once the government’s badbank, the National Asset Management Agency (Nama), relieves five of the six Irish-owned lenders ofburdensome loans worth about 87 billion euros (£74bn), amounting to half of Ireland’s gross nationalproduct. Job losses and closures are already in view for many in Ireland. “The emerging consensus isthat there will only be three banking groups – Allied Irish Banks and Bank of Ireland, and a thirdcontaining, though not exclusively, Permanent TSB, Irish Nationwide and EBS,” said Dermot O’Leary,chief economist at Goodbody Stockbrokers in Dublin. However, the insurance sector may havepositive surprises for the future of the Irish financial industry. Zurich Insurance Plc. decided onSeptember 6th to base its European insurance centre in Dublin. Zurich, having its primary headquartersin Switzerland, was considerably disadvantaged. It looked around Europe to find a business-friendlycountry that fulfilled all the requirements and they decided for Ireland.ItalyItaly’s economy shows first timid signals of recovery after facing its worst post-war recession.Confindustria’s research centre made a slight upward revision to its forecast for GDP growth next yearto 0.8 per cent in 2010 compared to the OECD report estimating it around 0.2 per cent. Nevertheless,Confindustria, the main business association in Italy, remains cautious when talking about recovery.“Italy’s economic growth is likely to be slow and unstable in the future”, points out Luca Paolazzi, chiefeconomist of Confindustria. Emma Marcegaglia, head of the business association, described 2009 ascatastrophic and urged the government to undertake more ambitious reform plans in order tostimulate Italy’s growth capacity. Meanwhile, Finmeccanica, Italy’s largest high tech company, enjoysa very positive moment. After becoming the second-largest defence operator in the UK after BAESystems, last summer Finmeccanica also acquired DRS, the US defence electronics company, theItalian enterprise just signed a deal with the Libyan Investment Authority to develop business in civilengineering. The venture aims to gain a generous slice of Mediterranean and Middle Eastern civilengineering orders.LatviaThe International Monetary Fund (IMF) warned Latvia that its entire 7.5 billion euros economicrescue package, granted last December, would be delayed unless the country reached agreement withthe Fund over the latest aid instalment. After difficult negotiations over additional spending cuts andtax hikes, Latvia agreed on additional austerity measures to secure more aid from the IMF; i.e. Latviahas to cut its budget by 500 million lati a year until 2012. The breakthrough came as Latvia received itslatest 1.2 billion aid payment from the European Union, its second instalment (the first 1 billion euroloan was received in February 2009) in the context of the Balance of Payment loan assistance grantedto Latvia in January this year and it now looks forward to Latvia fulfilling the conditions for further
  8. 8. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 14/09/2009 To view full articles click on hyperlinks.installments. As this Baltic country is struggling with the deepest recession in the EU, Estonia’sgovernment also promised to sign up to a 100 million euro loan agreement with Latvia, which will bediscussed during the work on Estonia’s state budget for 2010. On 27 August, the IMF agreed toincrease Latvia’s allowed deficit for this year’s budget to 13 per cent of GDP.LithuaniaDuring the second quarter, Lithuania’s GDP declined by 22.4 per cent. The steeper than expecteddrop raised doubts about the countrys ability to survive the crisis without international help andincreased concern about the plight of neighbouring Latvia and Estonia. Lithuanias president, DaliaGrybauskaite, has admitted that her country could be forced to seek help from the InternationalMonetary Fund if it fails in a bid to raise more money from foreign capital markets to prop up its weakeconomy.ThefNetherlandsDutch banks will be the first in the world to put a cap on the value of bonuses paid to their mostsenior executives according to a new code that will restrict such pay-outs to one year’s salary. Thecode, drawn up by the Dutch bankers’ association and the finance ministry, will limit variable pay forexecutive board members to the same level as their annual salary, once it comes into effect in January.The deal is the result of pressure from the finance ministry following a series of bail-outs of the sectorlast year. It underscores a political will in the Netherlands to press ahead with caps on pay even if abroader international consensus fails to materialise at a G20 summit of big economies in Pittsburghlater this month.PolandAlthough Poland had originally planned a budget gap of 18 billion zloty, the global slowdown forcedthe government to increase the projected deficit to 27.2 billion zloty. Struggling to plug a hole in itsbudget, the government has decided to speed up sales of assets in a string of companies in order toraise nearly 37 billion zloty by the end of 2010. The International Finance Corporation (IFC), a memberof the World Bank Group, plans to invest $5 million in Polands first microfinance bank to support themicrofinance sector and improve access to finance for micro and small businesses. The PolishInformation and Foreign Investment Agency (PAIiIZ) has opened a one-stop information center forforeign companies interested in obtaining European Union funds to help finance projects in thiscountry. Poland still remains an attractive investment destination despite the global economic crisis.Polish exporters are helped by a weaker zloty, which has made Polish exports more competitive.However, an increasing number of economists are warning that it will not be the last two quarters ofthis year which will be the poorest period for the domestic economy, but rather the first half of 2010.They fear is that GDP could fall to a negative value after being pulled down by falling consumerdemand, decreased corporate investments and a reduction in the value of net exports. The Polish Oiland Gas (PGNiG) could be in need of an enormous cash injection by the middle of 2010 when its €600million credit line expires.
  9. 9. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 14/09/2009 To view full articles click on hyperlinks.PortugalAfter official figures revealed that the Portuguese economy had emerged from a year-long recession,comes yet another sign that the country is firmly on the road to recovery. The latest evidence comesfrom the respected Global Property Guide. In its latest report it says that Portugal is one of only sevencountries in the world to report increases in house prices for the second quarter of the year, while thebuilding industry reported double-digit growth. Globally, the crisis has resulted in the loss of 152,000jobs in the space of one year. Unemployment figures rose to 9.1 per cent, meaning more than half amillion people in this country are without a job. According to the National Statistics Institute’s (INE)figures from April, May and June, more than 1.5 million employees earn less than 600 euros permonth, the equivalent of 35 per cent of all workers employed by someone else. However, thesestatistics also reveal that the number of people who earn poor salaries has decreased. This is believedto have been a result of the economic crisis, which mainly affected those with non-qualifiedprofessions, such as construction and factory workers.SlovakiaThe financial crisis has hit Slovakia harder than many expected. The Ministry of Finance expects grossdomestic product to contract by 6.2 per cent this year (recovering to an anaemic 0.5 per cent growthin 2010), after a rise of 6.4 per cent last year and 10.4 per cent in 2007. The main cause of the slump isthe economy’s dependence on exports to Western Europe, primarily Germany. With Germany in asteep decline, sales of Slovak cars and electronics have fallen sharply. The Volkswagen factory northof Bratislava temporarily shut down production earlier this year. The country’s other two big carmakers, Kia and PSA Peugeot Citroën, have also slashed production and occasionally halted output attheir factories. But they have fared slightly better than Volkswagen because of the recent increase inGerman sales caused by the government car-scrapping subsidy of 2,500 euros, which has helpedmakers of smaller cars. Factories such as the Whirlpool washing machine facility in northern Slovakiahave been forced to shed workers as exports plunge. The Slovakia-based low-cost carrier declaredbankruptcy on 31 August after seven years on the market. SkyEurope was the only company whichmanaged, without the assistance of the state, to boost the Bratislava airport – and from approximately500,000 passengers in 2004 increased the number to 2 million in three years. The budget deficit isexpected to reach 6 per cent of GDP this year, but so far the government is not doing much to slashspending and bring in further necessary reforms. Programmes announced so far call for symbolic stepssuch as halting purchases of cars and copying machines for ministries. Joining the euro has providedsome protection against the turmoil unleashed by the economic crisis, but being a member of thecommon currency also has its costs. Slovakia’s workers are now more expensive than theircounterparts in Poland and Hungary, which could impede the speed of an eventual recovery.SpainThe Spanish unemployment rate climbed up to 17.9 per cent at the end of the second quarter of2009 according to Spain’s National Statistics Institute (INE), the highest level in the eurozone and wellabove the 8.9 per cent average of the 27 EU member states. In fact, Spain makes up over half of the
  10. 10. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 14/09/2009 To view full articles click on hyperlinks.past year’s increase in eurozone unemployment, with over 30 per cent of the eurozone’s jobless livingin Spain. The Organization of Economic Cooperation and Development (OECD) predicts that Spain’sjobless will reach 20 per cent of the workforce during 2010, gradually edging closer to the historic highof 24 per cent recorded in 1994. The large number of unemployed not only presents obviouseconomic difficulties for Spain such as falling productivity and a heavy drag on demand, but the socialconsequences are also being felt. Protests have erupted across Spain as citizens struggle to deal withthe economic crisis. The government in Spain announced it will extend benefits for unemployed. Thegovernment is also considering an increase in capital-gains tax as a result of the economic crisis, butwill not raise tax rates on earned income. Spain’s Prime Minister, Mr. Zapatero, and his cabinet haveoverseen a yawning budget deficit expected to reach 10 per cent of gross domestic product this year.They are now struggling to prepare a budget for 2010 in the face of falling revenues, higher statespending and resistance from the smaller political parties they need to pass laws in Parliament. Mr.Zapatero insisted that the government would restore budgetary stability and meet the EU target of amaximum deficit of 3 per cent of GDP. Spain says it will meet the target again by 2012, butindependent economists are skeptical given the dire state of government finances and the fact thatthe country has the highest unemployment rate in the EU. The Spanish economy shrank 4.2 per cent inthe second quarter compared with the previous year and unlike other large eurozone economies isexpected to continue contracting for the rest of the year.SwedenThe Swedish government announced it intends to boost Swedens municipalities and councils withsome $US 810 million in order to combat recession. More than half of the money will be paid this year,the rest of the sum will be remitted over the next four years. Even though the Association of LocalAuthorities and Regions has conceded that the shortfall in taxes actually turned out less severe thanfeared, everyone expects the number of citizens relying on social welfare benefits to rise in the comingyears. The head of the Association of Local Authorities and Regions, Anders Knape, also welcomed thebudget proposal calling it a helpful means to avoid layoffs. Another more or less unforeseeable itemon the bill is the preparations concerning a possible epidemic outbreak of the swine flu. Two weeksago, the government had already signalized that local regions will get an extra 135 million dollars tovaccinate the population against the H1N1 virus.United KingdomThe British government will act immediately to moderate further increase in public debt. British PrimeMinister Gordon Brown raised it in his speech to finance ministers at the G20 summit of the mostimportant economies. Mr Gordon Brown wants to prove the current government is capable to rein inan increasing budget deficit that in April touched 175 billion pounds. Britain had much bigger debtbefore, and right now across the developed world other governments are also seeing their balancesheets blow out, thanks to the financial crisis and its recessionary aftermath. Moreover, some of theborrowing was necessary - it helped shore up the banking system and mitigate the worst effects of therecession. The next government will have to be able to juggle the necessity of keeping up the
  11. 11. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 14/09/2009 To view full articles click on hyperlinksrecovery while avoiding instability of public finances: “A policy of sole budget cuts risks sending arecovering economy straight back into intensive care”. In fact, Bank of England took the decision ofholding interest rates at 0.5 per cent considering that it was premature to review fiscal and monetarystimuli.WORLDWIDEBrazilBrazil’s Finance Minister Guido Mantega announced on 9 September that the government will make aone-off 10 billion dollars contribution to the International Monetary Fund (IMF) to finance programsthat help countries affected by the financial crisis. The agreement will be formalised this month inPittsburgh, Pennsylvania, at the G20 summit on 24-25 September. Brazil, counting on foreignexchange reserves of more than 200 billion dollars, is one of the countries that were least affected bythe global financial and economic downturn.ChinaChinese Premier Wen Jiabao vowed to continue his governments aggressive stimulus efforts, sayingthe worlds third largest economy faces persistent problems and uncertainties from the globalrecession despite an upturn in growth. Meanwhile the economic stimulus sustains employment levelsin China. The rapid rebound in the economy is considered to be a result of heavy public investment.RussiaDmitry Medvedev announced positive economic data for the third quarter of 2009, which Russia’spresident says point to the first signs the country may be emerging from its year-long economic crisis.The Russian economyis showing 7.4 per cent gross domestic product growth in the second quartercompared with the first. However, Russia’s president remains cautious and announces that the futureis still uncertain. The figures for 2009 still represent a sharp 10.9 per cent drop when compared to thesecond quarter of last year. Furthermore, employment and industrial production remain at theirlowest levels since 1999.UniteddStatesThe US government sees now the possibility to implement an exit strategy for its emergency financialmarket support programmes put in place in late last year and early this year to stop the financialsystem from collapsing. Treasury expects large banks to pay back $50 billion or more in governmentpreferred equity on top of the 72.3 billion dollars in preferred stock and loans repaid to date. On theother side, the battle for the Healthcare plan continues. President Obama set the size of a health-insurance plan at 900 billion dollars over 10 years. It is to be self-financed through spending cuts andtax increases. Most individuals would be required to purchase health insurance, but the costs would
  12. 12. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 14/09/2009 To view full articles click on mitigated by generous tax credits. Large employers would also face a requirement to offer healthcoverage to employees or pay a fine, while most small businesses would be exempt.INSTITUTIONSG-20 Finance Ministers Meeting: The focus of the G20 meeting on 4-5 September shifted fromcrisis-fighting to figuring out how to establish a safer financial system. After two days of meetings inLondon, the Group of 20 finance ministers and central bankers agreed the broad outlines of a toughnew regulatory framework for financial institutions. In broad terms, the group agreed three majorpoints about banking regulation: banks must raise much more capital once the financial crisis haspassed, complex financial institutions should develop “living wills” to plan for their unwinding shouldthat ever become necessary and banks should be required to retain some portion of loans theyrepackage and sell as asset-backed securities. But beneath the rhetoric, significant differences remainbetween the US and the UK on one hand, Europe, and the developing countries led by China. Thefinance ministers asked the newly created Financial Stability Board to come up with a set of principlesto put to the Pittsburgh Summit in three weeks time - and indeed the broad principles have been inplace since the last G-20 in March. These include the right of regulators to regulate the overall totalbonus payments, and the way compensation is paid. Although the global economy looks brighter thanwhen the Group of 20 finance ministers and central bankers met in April, their closing statement saidthey would not remove economic stimulus until the recovery was well entrenched. While the timing ofthese eventual policy reversals may vary, the G-20 said for the first time there should be somecoordination to avoid adverse international fallout.European Union (EU): The European Central Bank (ECB) has raised its forecast for economicgrowth in the eurozone and kept interest rates at 1 per cent. The head of the bank said there was anexpectation that "severe contraction" would now be followed by a period of "stabilisation and gradualrecovery". Eurozone rates were cut from 1.25 per cent to a record low of 1 per cent in May this year.Eurozone economic activity rose in August for the first time in 15 months, according to an influentialsurvey. The latest Purchasing Managers Index (PMI) figure rose to 50.4, raising hopes that theeurozone could soon emerge from recession. But separate figures show that retail sales in theeurozone fell in July. In the eurozone, the unemployment level hit a 10-year high in July as the impactof the recession continued to be felt. The number of people unemployed across the eurozone regiontotalled 15.1 million people in July, a seasonally-adjusted rate of 9.5 per cent. This was the worstmonthly percentage figure recorded since May 1999.
  13. 13. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 14/09/2009 To view full articles click on hyperlinksInternational Monetary (IMF): IMF Managing Director Dominique Strauss-Kahn said the globaleconomy "appears to be emerging" from the downturn, but warned the rebound may be sluggish. Thefinancial sector is not immune from further instability, "particularly if efforts to restore banks tohealth are not completed," he said. He said theres a "real danger" policy makers will withdrawsupport measures for their economies too soon, jeopardizing the recovery from the global recession."Given the fragility of the recovery, there are risks that it could stall," Strauss-Kahn said, "Prematureexit from accommodative monetary and fiscal policies is a principal concern."Organisation for Economic Cooperation and Development (OECD): A recovery in theworld’s economy now looks likely to come earlier than had been expected just a few months ago,although the return to normal conditions is likely to be slow and protracted, according to theOrganisation for Economic Co-operation and Development.EPP VIEWSStepping up his campaign to win a second term as President of the European Commission, JoséManuel Barroso promised more action to pull Europe out of the economic downturn. PresidentBarroso published a 41-page policy agenda in which he offered to be more accountable to Europeandeputies and to attend a regular “Question Hour.” The document notes that some officials have triedto use the economic crisis “as a pretext to attack the single market,” which, José Manuel Barrosowrote, the commission regards as “the rock on which European growth is built.” The EPP Groupsupports Barrosos model of a social market economy. Joseph Daul MEP, Chairman of the EPP Groupin the European Parliament stated: “Having been plunged into the worst economic crisis in its recenthistory, the European Union must act in unison, in a coordinated fashion, and without protectionismto come out on top”.OUR COMPETITORS’ VIEWSTaxing cross-border capital transactions could represent an alternative source of funding for the EUbudget, and such revenue might also provide financial means to fight climate change, EuropeanSocialist and Green leaders have said. The President of the Party of European Socialists Poul NyrupRasmussen said in a debate that a transaction tax should be considered at European level as a “sort ofsecond generation Tobin Tax” . The “Tobin Tax” was initially proposed in 1971 by later Nobel PrizeJames Tobin, intended to tax cross-border currency trading and restrict short-term currencyspeculation. It is often said to be fixed at 1 per cent but despite repeated debate it was neverimplemented or taken seriously even when the EU had a majority of Socialist governments.Rasmussen also renewed the proposal for EU bonds as a means to raise money in the name of theEuropean Commission and helping to reform the funding system of the EU.
  14. 14. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 14/09/2009 To view full articles click on hyperlinksFROM THE BLOGOSPHERE…Why the public option matters: Paul Krugman on the healthcare reform proposed by the ObamaAdministration.Why it is still too early to start withdrawing stimulus: Martin Wolf analyses the prospects for globaleconomic recovery and the role played by economic stimulus packages.The economic potential of high-speed rail: Ben Adler on the US project to develop high speed railservices in the United States and the possible impact on the economy.UPCOMING EVENTSEvent: Extraordinary Summit of EU leadersdddddddddddddddddddddddddddddddddddddddddddDate: 17 September 2009, BrusselsEvent: G-20 SummitfffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffDate: 24 - 25 September 2009, PittsburghEvent: Eurogroup and ECOFIN meetingsddddddddddddddddddddddddddddddddddddddddddddddDate: 1 - 2 October 2009, BrusselsEditor: Roland FreudensteinffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffResearch Assistance: Katarína Králiková vvvvvvvvvvvvvvvvvvvvvvvvvvvvvvAdditional Assistance: Xochil Guillen, Vincenzo ConfortivvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvDesign: José Luis FontalbadddddcccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccQuestions and comments:
  15. 15. Centre For European Studies ECONOMIC RECOVERY WATCHAnnex EU interim forecast: coming out of the recession but uncertainty remains highAs global conditions improve, signs for an immediate economic recovery are increasing – but may not provelasting. The European Commission published its latest interim economic forecasts on 14 September 2009. Theunderlying message is that signs for an economic recovery are apparent, also thanks to strong policyinterventions, but the sustainability of the recovery remains to be tested. The Commission sees signs of animminent economic recovery and fears of a prolonged and deep recession are fading. GDP growth is set to turnpositive in the second half of the year. However, the forecast for 2009 as a whole remains unchanged as theprevious estimates for 2008 and the first quarter of 2009 proved weaker. GDP is expected to fall by 4 per cent inboth the EU and the euro area this year. The improved economic outlook reflects external conditions beingincreasingly favourable. Recent data for trade and industrial production, as well as business and consumerconfidence, are generally encouraging. The resilient private and public consumption and advancements in theinventory cycle will also support growth in Europe.Table 1: Real GDP growth Quarterly GDP forecast Annual GDP forecast (%, quarter-on-quarter) (%, year-on-year) 2009 2009 Spring forecast Interim forecast 2009/1 2009/2 2009/3 2009/4 May 2009 Sep. 2009Germany -3.5 0.3 0.7 0.1 -5.4 -5.1Spain -1.6 -1.1 -0.4 -0.2 -3.2 -3.7France -1.3 0.3 0.4 0.3 -3.0 -2.1Italy -2.7 -0.5 0.2 0.1 -4.4 -5.0Netherlands -2.7 -0.9 -0.4 0.0 -3.5 -4.5Euro area -2.5 -0.1 0.2 0.1 -4.0 -4.0Poland 0.3 0.5 0.1 0.0 -1.4 1.0United Kingdom -2.4 -0.7 0.2 0.5 -3.8 -4.3EU27 -2.4 -0.2 0.2 0.1 -4.0 -4.0Note: the quarterly figures are working-day and seasonally adjusted, while the annual figures are unadjusted
  16. 16. Centre For European Studies ECONOMIC RECOVERY WATCHThe rate of consumer-price inflation declined in the first half of 2009 driven mostly by the base effects of pasthikes in energy and food prices. Inflation seems to have reached a trough of 0.2% in July in the EU (-0.7 per centin the euro area). Inflation rates are projected to increase towards the end of the year as base effects reverseand commodity prices are on the rise. For the year as a whole, the outlook for consumer-price inflation remainsunchanged at 0.9 per cent in the EU for 2009 (and 0.4 per cent in the euro area).Table 2: Consumer price inflation Quarterly HICP forecast Annual HICP forecast (%, year-on-year) (%, year-on-year) 2009 2009 Spring forecast Interim forecast 2009/1 2009/2 2009/3 2009/4 May 2009 Sep. 2009Germany 0.8 0.2 -0.2 0.6 0.3 0.3Spain 0.5 -0.7 -0.8 0.9 -0.1 0.0France 0.7 -0.2 -0.6 0.2 0.2 0.0Italy 1.4 0.9 0.1 1.1 0.8 0.9Netherlands 1.8 1.6 -0.1 1.2 1.4 1.1Euro area 1.0 0.2 -0.3 0.7 0.4 0.4Poland 3.6 4.3 4.2 3.3 2.6 3.8United Kingdom 3.0 2.1 1.3 1.1 1.0 1.9EU27 1.6 0.9 0.3 0.9 0.9 0.9Looking into next year, uncertainty is rife also due to the influence of temporary factors. The full impact of theeconomic crisis on labour markets and public finances is, at least partly, still to be faced. Risks to the outlookappear broadly balanced. While the strength of the recovery could surprise on the upside in the near term, itssustainability is yet to be tested – and will be considered in the upcoming fully-fledged forecast in which allcountries are assessed over a forecast horizon that includes 2011 (planned for 3 November). The Commissionusually publishes economic forecasts four times a year – comprehensive spring and autumn forecasts andsmaller interim forecasts in February and September. The Commissions interim forecast is based on updatedprojections for France, Germany, Italy, the Netherlands, Poland, Spain and the UK – together accounting forsome 80% of the EU’s GDP.