Financial Crisis Watch 13 May 2009


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Financial Crisis Watch 13 May 2009

  2. 2. Centre For European Studies FINANCIAL CRISIS WATCHLast updated on 13/05/2009 To view full articles click on hyperlinks. Foreword by CES Head of Research “Watchtower: Real Evidence” As the EP election day on June 7 draws closer, and the campaign gathers speed, the Europeansocialists are intensifying their polemics against the EPP, still hoping that they can somehow profitfrom the financial and economic crisis by blaming it on the EPP family and its majority among EUmember state governments and in the European Parliament, as well as on the Commission underPresident Barroso. Beginning with the rather lofty “People First!” election manifesto of December 2008 and, so far,culminating in the “15 falsehoods” of the EPP enumerated on the PES website of last week, socialistpolemics is intensifying. It is ostentatiously directed against “conservatives”, by which the PES meansthe EPP family which is, as we all well know, on the party level composed mainly of ChristianDemocrats and centrists. But the semantics of labeling the competitors is only the first element. On the national level, the PES manifesto claims that “where the left is in power, we can see realevidence of what socialists and social democrats can achieve.” At closer look, out of the few EUmember states where socialists and social democrats are, or were until very recently, ruling alone or ina leading role, the left’s track record looks pretty abysmal. Spain under José Luis Zapatero has, withclose to 18 %, Europe’s highest unemployment. In Hungary – with, among many disasters, one ofEurope’s worst credit ratings - the government of Ferenc Gyurcsány has just gone down in flames andgiven way to a caretaker government. In Slovenia, the socialist-led coalition under Borut Pahor isperilously close to falling apart. And Britain’s Labour government led by Gordon Brown is one thatmost European socialists would rather not want to be seen with in bright daylight, anyway. So muchfor the real evidence. What’s more, EU-wide opinion polls in the run-up to June 7 are not giving the socialists much hope,because even in countries with the left in opposition or in government as the junior partner, there isno “surge” in sight. So far, Europe’s left is simply not profiting from the crisis. There are many reasonsfor this, ranging from internal disputes to the lack of a clearcut and generally acceptable politicalalternative to centre right economic policies (see the first “Watchtower” commentary from January 12,2009). One of them, and certainly not the least one, is the real evidence from the countries where theleft is in power.
  3. 3. Centre For European Studies FINANCIAL CRISIS WATCHLast updated on 13/05/2009 To view full articles click on hyperlinks.FINANCIAL CRISIS: ACTIONS TAKEN BY EU MEMBER STATESBelgiumThe proposed sale of the Belgian banking branch of the Fortis financial group to the French companyBNP Paribas received the long awaited approval from the shareholders. Opponents of the sale believethe company should have retained the banking business because this would have increased thechance of their shares gaining in value. However, a majority of 73 per cent eventually approved thesale to BNP Paribas. (03/05/2009)Fortis shareholders approve banking sale (New Europe)BulgariaBulgarias Economy and Energy Minister Petar Dimitrov said that 3 per cent decrease in BulgariasGross Domestic Product (GDP) is due to the shrinking of the industry. The Minister further stated thatif the harvest and the tourist season end up being good for Bulgaria, the country could avoid recessionand the economy during the second and third quarter could run into positive figures. (09/05/2009)Bulgaria Economy Minister: Tourism, farming to help avoid crisis (Sofia Novinite)CyprusCyprus is to launch its largest ever bond issue as it seeks to raise one billion euros (1.4 billion dollars)to help refinance its debts, Finance Minister Charilaos Stavrakis said on 12 th May. He agreed that theissue was a "big challenge" because of the unpredictable global economic climate. It will mark thecountrys first appearance on the international investment scene for five years. The Minister said thathe and his team will give around 10 presentations in four European financial centres – the first inLondon, followed by Paris, Frankfurt and then either Amsterdam or Milan. (12/05/2009)nnnnnnnnnnCyprus to launch billion euro bond issue (EUbusiness)Czech RepublicLeaders of the current social Troika countries (the Czech Republic, Sweden and Spain), the EuropeanCommission and European social partners met in Prague on 7th May to discuss the impact of thecurrent crisis on employment. “Millions of Europeans are losing their jobs and we must do all we canto create new jobs in Europe to offer to the unemployed,” said European Council President MirekTopolánek. “We must also keep the cost of all these measures in mind because, as I have already saidseveral times, creating debt is no solution. We agreed that we need to modernise the social securitysystem, which should work as a kind of trampoline to enable people to get back on the labour marketquickly.” (07/05/2009)Employment Summit offers solutions to unemployment (EU2009.CZ)
  4. 4. Centre For European Studies FINANCIAL CRISIS WATCHLast updated on 13/05/2009 To view full articles click on hyperlinks.On the backdrop of falling external demand, the Czech economy is expected to be in recession in2009, with domestic demand, stock building and external balance contributing negatively to economicgrowth. GDP is expected to contract by 2.7 per cent in 2009 and to move back into positive territory in2010. (04/05/2009)Spring 2009 economic forecast: Czech Republic (European Commission)EstoniaThe government of Estonia announced that it would take out a 6.5 billion kroon (415 million euros)loan from two European banks. Prime Minister Andrus Ansip said the money would help the countrytackle its deficit in an effort to bring the economy in line with the Maastricht criteria and allow it tojoin the eurozone sometime in 2011. “We are planning to bring down the budget deficit to 3 per centof Gross Domestic product (GDP).cccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccc(07/05/2009)mmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmEstonia to take multi-billion kroon loan to cut deficit (The Baltic Times)Recession-hit Estonia plans fresh spending cuts aimed at keeping the 2009 budget deficit below 3.0per cent of GDP in order to join the eurozone in January 2011, the finance ministry said on 5 May.Kristi Joesaar, a spokeswoman for Estonias finance ministry, said additional savings of 2.6 billionkroons were also planned through freezing state payments to pension funds and increases inunemployment security tax. (05/05/2009)ccccccccccccccccccccccccccccccccccccccccccccccccccccccccccEstonia plans fresh fiscal measures to keep on euro track (EUbusiness)France and ItalyFrance and Italy both saw sharp falls in industrial output in March, which were much larger thanforecast. French output was down 1.4 per cent in the previous month, said national statistics officeINSEE. Economists had predicted a decline of only 0.5 per cent. Production of electronic goods andoutput in the energy and food sectors fell, outweighing a rise in transport. Meanwhile monthlyproduction in Italy fell for the 11th month in a row, down 4.6 per cent in Februarys output. Analystshad expected a monthly drop of 1.6 per cent. (11/05/2009)ddddddddddddddddddddddddddddddddFrench and Italian output drops (BBC)GermanyGermany’s generous welfare system could collapse as early as this year because of the economic crisisand misguided confidence-boosting measures by the government, experts have warned. The warningwas made after Angela Merkel’s cabinet adopted a permanent ban on pension cuts, shielding 20mpensioners who might have faced old-age benefit cuts next year, from the effect of the economiccrisis. (08/05/2009)Threat to German welfare system (Financial Times)
  5. 5. Centre For European Studies FINANCIAL CRISIS WATCHLast updated on 13/05/2009 To view full articles click on hyperlinks.The European Commission announced on 7th May that it has approved a capital injection of €18 billionfor Commerzbank. The Commission agreed to authorise the aid in exchange for commitments fromthe bank to sell off subsidiaries and refrain from merger activity. Both the German government andCommerzbank have said that the aid is needed to shore up the banks finances. Peer Steinbrück,Germanys finance minister, criticised the Commission for taking too long to approve the aid.(07/05/2009)dddddddddddddddddddddddddddddddddddddddddddddddddddddddddddddddddCommission approves €18bn in aid for Commerzbank (EuropeanVoice)Fiat’s plan to build a European car group with Chrysler and GM’s German unit, Opel, began to hitobstacles as Berlin issued a string of conditions for any Opel buyer, and dissident Chrysler creditorssaid a sale to Fiat would be “patently illegal”. The moves came as Sergio Marchionne, Fiat’s chiefexecutive, met government and union officials in Berlin in the first round of his campaign to securepolitical backing by the end of this month for a car group with up to 7m in annual sales and combinedrevenues of €80bn ($107bn). (05/05/2009)Fiat setback in plans for European group (Financial Times)GreeceWhether or not Greece succeeds in avoiding its first economic recession since 1993 depends largely onthe survival of tens of thousands of small and very small companies, where, according to bankers andother experts, a domino effect of bankruptcy is a real possibility over the next four or five months. Thefinancial health of these small firms is very important for the Greek economy, unlike in other eurozonecountries where large firms account for the bulk of employment. There are some 800,000 companiesin Greece of which more than 790,000 are small or very small in size, about 6,000 are middle-sizedbusinesses and some 400 large ones. (11/05/2009)Small and very small firms are vital to any economic recovery (Kathimerini)Greece’s Minister of Economy and Finance Yiannis Papathanasiou was in Brussels to attend meetingsand seminars of his peers and financial analysts and economists to explain how their countries arehandling the recession and find ways out of it. Disputing the assertion of one moderator that Greece issuffering from social disharmony because of its economic state, he said Greece’s banks were not ashard hit as others in the EU by the US-started sub-prime mortgage crisis. Greece’s deficit is at 5 percent of GDP, well above the 3 per cent ceiling set by the European Union, but he said the country iscoming out of the worst phase and will recover. (11/05/2009)Solving the EU’s recession isn’t easy (New Europe)
  6. 6. Centre For European Studies FINANCIAL CRISIS WATCHLast updated on 13/05/2009 To view full articles click on hyperlinks.IrelandSmall firms in Ireland are waiting longer to be paid by public bodies and larger corporations, accordingto the Irish Small and Medium Enterprises Association (ISME). ISME Chief Executive Mark Fielding saidaccess to credit and the exchange rate between the euro and the British pound are driving companiesout of business. He said the problem with late payments is now worse than ever, with SMEs in Irelandwaiting an average of 69 days for payment. (11/05/2009)Irish SMEs crippled by late payments and exchange rate (EurActiv)LatviaLatvias GDP officially dropped 18 per cent in the first quarter of 2009, according to the CentralStatistics Bureau. In the first quarter of 2009, the production and services sectors continued to see adownturn. Manufacturing volumes fell by 22 per cent, retail by 25 per cent. Hotels and restaurantservices dropped by 34 per cent. Budget revenue also continued to decrease in the first quarter.(11/05/2009)Latvian GDP drops 18 per cent (The Baltic Times)LithuaniaLithuanian banks posted combined net losses in the first quarter of this year of 20.1 million litas (5.83million euros), the country’s Central Bank reported. The report followed news that the country issuffering from the worst recession in the European Union. In the first quarter of 2008, the net incomeof the banks was 337.2 million litas, the Central Bank said. Seven of Lithuania’s 16 banks reported aloss. (07/05/2009)Lithuanian banks hit hard (The Baltic Times)RomaniaRomania, on course to receive nearly 24 billion dollars in IMF and EU loans to battle an economicslump, is likely to see inflation of 4.4 per cent this year, the central bank said on 7th May. This will bebrought down to 3.5 per cent in 2010, the central bank added. (07/05/2009)Romania set for 4.4 per cent inflation this year (EUBusiness)SpainThe European Central Bank took investors by surprise with plans that could help stabilise house pricesin Spain and Ireland. In an initiative to stimulate the flagging eurozone economy, the central bankpledged to shore up one of the markets most savaged by the credit crisis by buying about €60bn(£53.5bn) in eurozone covered bonds, securities that usually attract triple-A ratings. (08/09/2009)ECB covered bond plan raises hopes for house prices (Financial Times)
  7. 7. Centre For European Studies FINANCIAL CRISIS WATCHLast updated on 13/05/2009 To view full articles click on hyperlinks.The rise of Spanish unemployment slowed markedly in April and consumer confidence increased forthe second month running to return to the level of a year ago. Registered unemployment rose by39,478 people or 1.1 per cent – a third of the rise in the previous month – to reach 3.64m, the LabourMinistry announced. Government ministers claimed credit for the development, saying that fiscalstimulus spending had started to have an impact on the labour market, although critics said thousandsof new jobs created by local authorities to repair infrastructure were temporary and of questionablevalue. (05/05/2009)Growth in Spanish unemployment slows (Financial Times)UnitedcKingdomBritain’s recession will be shorter and shallower than that in much of the rest of Europe, the EuropeanCommission forecast. But it warned that the country’s public finances would be among the worst inthe 27-nation bloc. Revising down growth prospects across Europe, the Commission reversed itsJanuary prediction that Britain would sit low down the EU economic league table. It now expects theUK economy to contract by 3.8 per cent this year, before growing by 0.1 per cent in 2010.(04/05/2009)Brussels sees UK economy contracting 3 per cent (Financial Times)FINANCIAL CRISIS: ACTIONS TAKEN WORLDWIDEChinaChinas consumer prices fell by 1.5 per cent in the year to April, figures show, the third consecutivemonth of decline. The drop came after food and energy prices eased from last years high levels, andfollowed annual falls of 1.2 per cent in March and 1.6 per cent in February. Food prices were down 1.3per cent in April from a year ago. (11/05/2009)Prices in China continue to fall (BBC)Chinas exporters are returning home to sell their products as global economic gloom takes a toll ontheir overseas orders. Despite a track record in manufacturing products to global standards for leadingbrands, many are finding it tough to tap into Chinas domestic market due to fierce and unfaircompetition, lack of local brand names and poor domestic distribution networks. (04/05/2009)China exporters, hit by slump, see potential at home (Reuters)
  8. 8. Centre For European Studies FINANCIAL CRISIS WATCHLast updated on 13/05/2009 To view full articles click on hyperlinks.JapanAmerican International Group Inc is near a deal to sell its Japanese headquarters for about $1 billion inwhat would be one of its largest asset sales since a September rescue. A Japanese insurance companyis expected to buy the prized building in the Otemachi section of Tokyo, although at least two partieswere looking at the property. (04/05/2009)AIG nears Japan building sale for $1 billion (Reuters)Japan will establish a scheme to supply up to about 6 trillion yen ($61.54 billion) to Asian nations in theevent of a financial crisis, Finance Minister Kaoru Yosano said. The yen swap plan will be in addition toJapans $38.4 billion contribution to a $120 billion regional liquidity fund. Both measures are aimed atsupporting the regions economies in a crisis, Yosano told reporters on the sidelines of the AsianDevelopment Banks annual meeting in Indonesia. (03/05/2009)mmmmmmmmmmmmmmmmmmmJapan to set up additional $61.5 billion scheme for Asia (Reuters)UnitedcStatescUS retail sales fell in April, dashing recent hopes that consumer spending might finally be stabilising asthe population continues to curb its purchases. Sales declined by 0.4 per cent in April against theprevious month and were off by 10.1 per cent on the year, commerce department figures showed onWednesday. The results disappointed analysts, who expected them to remain flat, and were down dueto falling sales of electronics, appliances and petrol. (12/05/2009)US retail sales 0.4 per cent fall in April (Financial Times)American International Group Inc is expected to post a first-quarter loss, but the embattled insurersresults will not trigger a new capital injection from the U.S. government. The loss in the first quarter isexpected to be significantly lower than its record fourth-quarter loss of $61.7 billion, the source said,adding that there would be no new bailout announced with the results. (05/05/2009)AIG to post first-quarter loss, no new bailout (Reuters)U.S. automaker Chrysler LLC won interim court approval to access a $4.5 billion bankruptcy loan fromthe U.S. and Canadian governments, pushing it further along toward its planned sale to Italys Fiat SPA.(05/05/2009)Chrysler gets court OK on loan, seeks Fiat sale (Reuters)Citigroup Inc may need to generate up to $10 billion in new capital to meet the requirements of theU.S. governments stress tests. Citigroup may need less if regulators accept its arguments about itsfinancial health. In a best-case scenario, Citigroup could have a roughly $500 million cushion abovewhat the government requires, the paper reported. (01/05/2009)cccccccccccccccccccccccccccccccccccCitigroup said to need up to $10 billion (Reuters)
  9. 9. Centre For European Studies FINANCIAL CRISIS WATCHLast updated on 13/05/2009 To view full articles click on hyperlinks.HIGHLIGHTSOn 7th May, the European Central Bank cut its principal interest rate by 25 basis points to 1per cent.The ECB decided to cut the interest rate on its marginal lending facility by 50 basis points to 1.75 percent and to keep the interest rate on its deposit facility unchanged at 0.25 per cent. Jean-ClaudeTrichet, the ECBs president, said that the decision to reduce rates was taken in the light of datashowing that the eurozones first quarter performance was “much weaker than expected”. He said theECB had not excluded further rate cuts. (07/05/2009)ssssssssssscccccccccccccccccccccccccccsssssssssssECB cuts interest rate to 1 per cent (EuropeanVoice)On 6th May, MEPs agreed new rules on capital requirements for banks, intended to help prevent arepeat of the financial market crisis. As a result of the vote at the plenary session in Strasbourg,financial institutions issuing securitised investments such as packaged mortgage loans will have toretain at least 5 per cent of the value on their own balance sheet. The European Parliament insistedthat this minimum rate could be increased at end of year. The rules have already been agreed with theCouncil of Ministers and will come into force by October 2010. (06/05/2009)cccccccccccccccccccccccccCapital requirements tightened up by Parliament (EuropeanVoice)The ECOFIN meeting on 5th May was attended by Commissioner Joaquín Almunia, Internal Marketand Services Commissioner Charlie McCreevy and Taxation and Customs Union Commissioner LaszloKovacs. The Council approved an increase to € 50 billion of the lending ceiling for the EU supportfacility for non-euro area Member States in financial difficulty. Among other points, Ministers alsodiscussed the quality of public finances in relation to age-related expenditures projections and theeconomic situation and financial market developments on the basis of the spring forecasts.(05/05/2009)Council conclusionsxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxECOFIN Meeting (European Commission)Europes economy will not start recovering until the second half of next year, the EuropeanCommission said on 4th May, cutting forecasts made little more than three months ago, in view of thedepth of the recession. Despite what it called positive signals, the EU executive said the Eurozone’seconomy would shrink by 4.0 per cent this year and 0.1 per cent next year, with its overall publicdeficit tripling by 2010 to 6.5 per cent of GDP. (05/05/2009),,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,No recovery before mid-2010, EU says (EurActiv)
  10. 10. Centre For European Studies FINANCIAL CRISIS WATCHLast updated on 13/05/2009 To view full articles click on hyperlinks.The first quarter of 2009 saw announced job losses outnumber job creation by almost three to one,according to the European Restructuring Monitor (ERM). The financial sector, auto industry and retailsector were worst hit by the losses, with new employment recorded in discount stores and fast foodoutlets. 220,000 job losses were recorded by the ERM – the highest since it began to collect statisticsin 2002 – with just 90,000 jobs created. (04/05/2009)............dddddddddddddddddddddd.....................Layoffs dwarf job creation across Europe (EurActiv)The latest official economic forecast predicts the EU economy will shrink by 4 per cent in 2009 – aftergrowing by 0.8 per cent in 2008. Almost all EU countries have been severely hit by the financial crisis,the sharp global downturn and, in some economies, ongoing housing market corrections. However, asfiscal and monetary measures to stimulate the economy take effect, growth is expected to resumebefore the end of next year (despite an overall growth forecast of -0.1 per cent for 2010). The figures –essentially the same for the euro area and the EU as a whole – are down compared with the autumnforecast and January 2009 interim forecast. (04/05/2009)vvvvvv vvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvFalling EU economy set to stabilise as measures take effect (European Commission)The European Commission on 29 April proposed a bigger budget for 2010 to lift the blocseconomy out of recession. The Commissions draft budget set spending at 122.3 billion euros ($161.4billion), compared with 116.7 billion euros planned for 2009. Programmes linked to research andenergy would see the biggest funding increase, at 12 per cent. (30/04/2009)ddddddddddddddddddddEU budget 2010 counts on innovation for recovery (EurActiv)OUR COMPETITORS’ VIEWS ON FINANCIAL CRISISPSEFrom 1st May, the European Globalisation Adjustment Fund, which has an annual budget worth 500million euros, can be used to help people who have lost their jobs in the wake of the economic andfinancial recession. “Europe is making a telling contribution to the mobilisation of millions of workersand trade unions in honour of Labour Day with the launch of the revamped European GlobalisationAdjustment Fund,” said a happy spokesperson for the Socialist Group in the European Parliament onsocial policy, the British MEP Stephen Hughes. (30/04/2009)Europe’s globalisation fund: helping victims of the economic crisis (PSE News)The European Commission’s proposals aimed at regulating the activities of hedge funds andinvestment funds are inadequate and come far too late in the day, reckon Socialist MEPs.(29/04/2009)Hedge funds: “Commission lacking in ambition” say Socialists (PSE News)
  11. 11. Centre For European Studies FINANCIAL CRISIS WATCHLast updated on 13/05/2009 To view full articles click on hyperlinks.Socialists approve a doubling of balance of payments assistance to 50 billion euros. Pervenche Berès,chair of the economic and monetary affairs committee, which had prepared Parliament’s position,issued the following statement after the vote: “This is a practical expression of vital Europeansolidarity with countries outside the euro area that are suffering the full effects of the economic andfinancial crisis.” (24/04/2009)Socialists approve doubling of balance of payments assistance to 50 billion euros (PSE News)For a Europe of social progress: This short paper, drafted by the PES Group of the EuropeanParliament, sets out some practical steps needed to put Europe on a new and better path, towards aNew Social Europe, as an essential part of the PES Groups and PES claims based on the PES Manifesto2009 "People First - A New Direction for Europe". (24/04/2009)For a Europe of Social Progress (PSE News)ALDEStrongly condemning the European Commissions lack of a clear strategy to fight the financial andeconomic crisis, former Belgian Prime Minister Guy Verhofstadt, a Liberal candidate for the EUelections, presented a manifesto-like book on how to rescue Europe from its worst economicdownturn since the Great Depression. "I have written the book out of anger, because I have seen noclear strategy in Europe to fight the crisis," said Verhofstadt, presenting his book, entitled Emergingfrom the crisis: How Europe can save the world. (13/05/2009) Verhofstadt slams Commissions economic recovery plan (EurActiv)The economic crisis requires a strong European response adapted to the diverse situations withinMember States and the varying employment conditions concerned. With this in mind Jean-MarieBeaupuy (MoDem, France), a co-shadow rapporteur for ALDE, praised the creation of the Europeanglobalisation adjustment fund, the project taken by the Barroso Commission during its mandate in thesocial domain. “With €500 million available, this fund could help thousands of Europeans victims ofthe present crisis. This act of solidarity, supported by the European Union, is a strong signal on the eveof the European elections on 7th June," he said. (05/05/2009)hhhhhhhhhhhhhhhhhhhhhhhhhhhhhhdEuropean globalisation adjustment fund: a strong signal for an active social policy (ALDE News)
  12. 12. Centre For European Studies FINANCIAL CRISIS WATCHLast updated on 13/05/2009 To view full articles click on hyperlinks.UPCOMING EVENTSEvent: Brussels Economic ForumccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccDate: 14 – 15 May 2009, BrusselsEvent: ECOFIN Meeting ccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccDate: 9 June 2009, LuxembourgcvccccccccccccccccccccccccccccccccccccccccccccccccccccccEditor: Roland FreudensteinffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffResearch Assistance: Katarína KrálikováccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccDesign: José Luis FontalbacccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccQuestions and comments:
  13. 13. Centre For European Studies FINANCIAL CRISIS WATCHANNEX: SPRING 2009 ECONOMIC FORECASTAustriaThe recession in Austria is projected to deepen in the first half of 2009. The trade surplus is expectedto shrink substantially and investment plans are likely to be curtailed. Industrial production is expectedto shrink markedly as business climate indicators and capacity utilisation have fallen sharply. As aconsequence, private investment in equipment is forecast to fall by 18 per cent in 2009 and tostagnate in 2010. Due to several fiscal measures, the projected decline is less severe for investment inconstruction.BelgiumIn 2009, the deficit is forecast to widen to 4.5per cent of GDP, compared to the governments target of3.4 per cent of GDP. The difference is largely explained by the more negative macroeconomic scenarioin this forecast. In 2010, under the usual no-policy-change scenario, the deficit is projected to reacharound 6 per cent of GDP, mainly due to the still negative economic environment, including a furtherdecline in tax-rich items such as private consumption and employment.BulgariaSince the beginning of 2009, economic sentiment and confidence indicators have deteriorated further,in line with the unfolding global economic crisis. This, together with falling industrial production andretail sales, points to a sharp slowdown ahead. Driven by weaker external demand and subdued creditgrowth, exports and domestic demand are expected to deteriorate significantly. For the first timesince 1997, real GDP is projected to contract by around 1½ per cent in 2009 and to stagnate in 2010.CyprusIn view of the ongoing global crisis, economic growth is expected to slow significantly in 2009 but stillremain in positive territory. Domestic demand should continue to drive growth. In the face of a risinghousehold debt burden and tight financial conditions in an uncertain environment, privateconsumption growth is projected to moderate. Economic activity is projected to recover only mildly inthe second half of 2010, due to a less negative contribution from the external sector.CzechcRepublicccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccOn the backdrop of falling external demand, the Czech economy is expected to be in recession in2009, with domestic demand, stock building and external balance contributing negatively to economicgrowth. GDP is expected to contract by 2.7 per cent in 2009 and to move back into positive territory in2010.
  14. 14. Centre For European Studies FINANCIAL CRISIS WATCHThe most significant economic drag stems from dismal export prospects, with order volumes falling atan extremely rapid rate. Exports, which in 2008 remained relatively stable despite a loss incompetitiveness, are expected to fall by more than 10 per cent in 2009. Rising unemployment shouldresult in a negative wage drift in 2009 and lead to more modest agreements for 2010.DenmarkThe outlook over the forecast period is one of a deepening recession that goes well beyond a merecorrection of the previous overheating. The most significant economic drag stems from dismal exportprospects, with order volumes falling at an extremely rapid rate. Exports, which in 2008 remainedrelatively stable despite a loss in competitiveness, are expected to fall by more than 10 per cent in2009. The government already passed sizeable expansionary measures in its 2009 budget bill. Much ofthis stimulus started to have an impact in the first half of this year. These measures entail a significantincrease in real disposable income in spite of a stagnating aggregate gross wage bill.EstoniaThe economy is expected to contract considerably in 2009, by around 10 per cent, and slightly furtherin 2010. Most confidence indicators remain at historically low levels, pointing to weak external anddomestic demand, low capacity utilisation and pessimistic expectations. While private sectorinvestments are expected to decline by around a quarter in 2009 and remain at low levels in 2010, apositive impact will come from the public sector investments.FinlandBenefiting from a strong economic upswing over the previous years, Finland built up a significantpublic sector surplus, reaching 4.2 per cent of GDP in 2008. While a large share of this reflects theaccumulation of pension fund assets, the central government also recorded a notable surplus. Thisprovided the government margin for a substantial fiscal stimulus of over 1½ per cent of GDP in 2009and about 1 per cent in 2010. Together with the operation of the automatic stabilisers, the currentfiscal surplus is forecast to turn rapidly into a deficit of nearly 3 per cent of GDP by 2010. Generalgovernment debt is projected to increase from over 33 per cent of GDP in 2008 to about 46 per cent ofGDP by 2010.FranceDespite modest GDP growth, employment continued to expand in 2008, by around 1 per cent, due todynamic job creation in the first half of 2008. In 2009 and 2010, employment prospects will reflect theweakness of economic activity in general. Specifically, the job shedding is expected to gain momentumas a result of the contraction of global activity and then gradually stop in the course of 2010, reflectingthe traditional lag between growth and employment. Total employment will fall by around 2 per centin 2009 and 1 per cent in 2010.
  15. 15. Centre For European Studies FINANCIAL CRISIS WATCHGermanyThe extent of the collapse in external demand in 2008 caught many firms by surprise. Despiteconsiderable cuts in production, there was substantial involuntary stock-building in the second half ofthe year. In response to the economic crisis and in the context of the European Economic RecoveryPlan, the German government adopted two stimulus packages consisting of both revenue andexpenditure measures. Even though these measures will not be sufficient to prevent a contraction in2009, they will help soften the downturn in the course of the year and into 2010.GreeceActivity is expected to be further affected by the ongoing economic crisis and prevailing uncertainty.Although remaining above the euro area average, economic growth will turn negative in 2009 for thefirst time since 1993. Public and corporate investment growth is expected to benefit from EUstructural funds inflows and the launch of public-private partnership investment projects, thusavoiding a further strong contraction in 2009 and 2010. Overall, domestic demand is projected tomake a negative contribution to GDP growth in 2009.HungaryAfter declining for two and a half years, real disposable income of households is foreseen to decreasefurther by more than 4 per cent in 2009 and is not likely to recover even in 2010. Moreover, sinceNovember 2008, households’ access to credits has narrowed considerably, thereby putting additionalpressure on consumers’ budgets. Consumption is therefore expected to fall by 6½ per cent in 2009and to decrease somewhat in 2010. The sharp downturn in production, due to weak external anddomestic demand and aggravated by the reduced functioning of the financial markets, is expected tohave an adverse effect on investments.IrelandIreland is facing a protracted and deep recession, with GDP projected to contract further, by around 9per cent in 2009 and 2½ per cent in 2010. Domestic demand should continue to be the main driver ofthe recessionary developments. In particular, an even stronger fall than in 2008 is projected for allinvestment components in 2009, with annual housing output almost halving. A further, albeit lesspronounced, reduction in investment is expected in 2010 as market confidence stabilises. At the sametime, despite the projected decrease in the price level, private consumption should fall significantlyand continue to decline in 2010, in the face of reduced disposable income and higher savings devotedto improving balance sheets.ItalyThe outlook for the first half of 2009 is strongly unfavourable. Short-term indicators point to aprotracted retrenchment of economic activity. In particular, industrial output contracted sharply in thefirst two months and is expected to have fallen again in March. In 2010, economic activity is projectedto stabilize at a low level. This is due to both domestic and external demand. On the domestic side,
  16. 16. Centre For European Studies FINANCIAL CRISIS WATCHprivate consumption is projected to return to mildly positive growth, while investment should takelonger to recover.LatviaRecent business and consumer survey results point to a further deepening of the recession. Houseprices – already back to early 2005 levels - continue their downward movement at an acceleratingpace. In 2009, investment is projected to fall sharply, as in addition to depressed domestic conditionsthe tradable sector is suffering cost competitiveness problems and lack of demand. Public investmentwill provide some cushion, taken into account that EU funded projects are safeguarded in the currentbudget. Recovery of private investment is projected to start only from end-2010, on the basis ofexternal demand. Overall, the economy is facing a very severe downturn, with GDP projected to fall byaround 13 per cent in 2009 and 3 per cent in 2010.LithuaniaThe economic downturn in Lithuania will be deeper and more protracted than previously assumed,mainly due to the worse external environment. Economic activity is expected to shrink by around 11%in 2009 and to a more modest degree in 2010. The economic downturn is likely to be accompanied bya sharp rise in unemployment – to nearly 14 per cent in 2009 and even further in 2010 – and asubstantial reduction in employment.LuxembourgThe recession is taking its toll on the Luxembourgish economy and primarily on its manufacturingindustry, which exports almost its whole production. The Luxembourgish economy might begin torecuperate around the end of 2009 following the expected timid recovery in the world economy.However, with the exception of public expenditure, which is projected to remain extremely dynamic,most demand components will only post very modest positive growth rates and real GDP is likely togrow only marginally in yearly average in 2010.MaltaThe worsening economic activity in Maltas main trading partners is expected to decrease exports overthe forecast horizon. Declining industrial order books in the first few months of 2009 suggest thatforeign sales of goods, dominated by semiconductors, will continue to shrink. For tourism, a reversalof the gains recorded in the past years is anticipated on the backdrop of sluggish demand, inparticular from the UK and Germany, Malta’s leading tourist markets. The contraction in exports isprojected to decline in 2010 in line with the assumed gradual international economic turnaround.Consistent with the slowdown in both private consumption and import-intensive exports, imports areforecast to contract in 2009, before recovering in 2010.NetherlandsEconomic growth prospects have again turned significantly less favourable, as the internationaleconomic slowdown is expected to be even more pronounced. The fall in annual GDP is now projected
  17. 17. Centre For European Studies FINANCIAL CRISIS WATCHto come out at 3.5 per cent in 2009. For 2010, the economy is forecast to contract by 0.4 per cent. Asthis figure includes a somewhat larger carry-over effect from 2009, mildly positive growth dynamics in2010 are implicit in the forecast. These positive dynamics are expected to come mainly from theexternal balance. Domestic demand in 2010, however, is expected to contribute negatively to growth,as consumption and investment are likely to suffer from a decrease in disposable income and the lowcapacity utilisation rate respectively.PolandIn the course of 2008, an impressive improvement was seen in the labour market, continuing thetrend seen since 2006, as the average annual unemployment rate fell to 7 per cent from 9½ per cent in2007. As economic activity is expected to weaken, employment should fall by 2¼ per cent in 2009 anda further 1½ per cent in 2010, while a return of emigrants, less generous early retirement rules and areduction of taxes on labour should increase the activity rate. The number of unemployed is projectedto reach some 1.7 million in 2009 – close to 10 per cent of the labour force – and to increase in 2010by about ½ a million, leaving the unemployment rate at around 12 per cent.PortugalAgainst the backdrop of the financial crisis and a marked recession in trading partners, GDP isexpected to fall by 3¾ per cent in 2009. These adverse shocks are projected to have lasting effects,with activity forecast to contract further, by ¾ per cent in 2010. Lower levels of activity will translateinto lower levels of employment and the unemployment rate could reach some 10 per cent in 2010.Wage moderation is expected to follow these developments.RomaniaIn view of the large domestic and external imbalances and the adverse effect of the global financialturmoil on the economic and financial situation in Romania, the authorities made a request to theEuropean Commission for balance of payments support in March 2009. The financial assistance thatthe EU intends to provide will be conditional on the implementation of a comprehensive economicpolicy programme, encompassing fiscal, financial sector and structural reform measures.GDP growth isprojected to turn negative in 2009 to around -4 per cent. The anticipated strong contraction of grossfixed capital formation will be cushioned by an increase in public investment, as EU funded investmentis safeguarded in the current budget. GDP growth is expected to remain around zero in 2010.SlovakiaAfter several years of sustained expansion in economic activity, GDP growth is expected to contract byaround 2½ per cent in 2009 and to slightly rebound, by some ¾ per cent, in 2010. On the externalfront, the downward trend in exports observed since mid-2008 will continue in 2009, when exportsare projected to fall by some 10 per cent before increasing again by a meagre ¼ per cent in 2010.Foreign trade developments coupled with an increase in the deficit of the income balance areanticipated to induce a widening of the current account deficit in 2009. A slight improvement isexpected in 2010, on the back of a decreasing trade and services balance deficit.
  18. 18. Centre For European Studies FINANCIAL CRISIS WATCHSloveniaAs a highly open economy, Slovenia is expected to suffer significantly from the deepening globalrecession. Real GDP is projected to contract by 3.4 per cent in 2009, followed by positive growth in2010. Exports are projected to gradually improve in 2010 in line with the assumed internationaleconomic turnaround. Private consumption should return to positive, albeit low, growth reflecting alower pace of job losses and a slight acceleration in wage growth. Government spending shouldcontinue to support economic activity. Investment should gradually benefit from these developments,but is expected to post a slightly negative growth rate for the year as a whole also on account of astrong negative carry-over from 2009.SpainGDP is projected to decrease sharply by 3¼ per cent in 2009, on the back of strongly contractingprivate consumption and investment. GDP is projected to continue contracting in 2010, by around 1per cent. Construction and equipment investment are forecast to decline substantially, as theadjustments in these sectors will not yet be completed. Private consumption is expected to fall byaround 3¼ per cent in 2009, despite the expected job impact of the fiscal stimulus and lower interestrates. In line with economic activity, job losses are set to increase significantly in 2009 and, to a lesserextent, in 2010. Employment is expected to fall by more than 5 per cent in 2009 and 2¾ per cent in2010.SwedenThe outlook for the forecast period is one of continued contraction in the first three quarters of 2009followed by a muted and fragile recovery as from the fourth quarter. Activity indicators point to a veryweak start of the year, with industrial production and exports continuing to fall sharply. Governmentconsumption should act as a stabiliser. However, rapidly worsening employment prospects and theneed for households to rebuild their assets after sharp falls in the stock market are likely to put adampener on private consumption growth over the forecast period. A combination of the bottomingout of the global downturn towards the end of 2009 and a significantly weaker Swedish krona shouldmake a muted export-led recovery possible in 2010.United KingdomThe UKs economic prospects are dimmed by continued restrictive credit conditions, global demandweakness, asset price falls and subdued confidence levels amongst households and businesses. Thecentral outlook expects quarterly growth to remain negative for the first three quarters of 2009 due toa pronounced fall in domestic demand, followed by two quarters of virtual stagnation and only agradual return to slight positive growth by late 2010.NorwayNorway is relatively resilient to the weaker global demand through its large oil sector and its directimpact on the local economy via strong public consumption growth. The financial crisis will manifestitself chiefly by capital being harder to come by and more expensive. Unemployment reached itslowest level in 20 years in 2008, despite high labour force growth. However, it is now forecast toincrease considerably in the next two years. Inflation peaked in 2008 at close to 4%, but is expected todecrease to just above 1 per cent during the forecast years.
  19. 19. Centre For European Studies FINANCIAL CRISIS WATCHSwitzerlandSwitzerlands four-year economic upturn ended in 2007. Foreign demand, which initially drove theupswing, will now become a major contributor to the contraction, along with shrinking domesticdemand. The global slowdown will turn GDP growth in Switzerland negative: to -3.2 per cent in 2009and -0.5 per cent in 2010. Foreign demand for Swiss goods and services will contract in 2009 andthough demand for goods will rebound slightly in 2010, it will remain negative overall.IcelandAfter a period of high growth rates supported by large investment projects and strong domesticdemand, which have generated significant imbalances, Iceland is now facing the consequences of thecurrency crash of 2008 and the ensuing economic crisis. Domestic demand declined sharply, Incomesare under pressure and unemployment is set to increase significantly this year in all sectors,particularly the banking sector. GDP should return to growth in 2010 though there are significant,mostly currency related, risks to the forecast.CroatiaThe global financial crisis is increasingly taking its toll on the Croatian economy. The markeddeterioration of the external environment, including a projected growth slowdown in Croatias majorEU trading partners, will have a heavy impact on the Croatian economy. External financing constraintshave become tighter and spreads have increased. Higher domestic borrowing costs and a decline inconfidence levels will lead to a considerable reduction in private investment activity. Moreover, itcannot be excluded that cross-border lending, currently an important financing source of thecorporate sector, will be adversely affected by the global financial crisis. Public investment is likely toslow. These effects will lead to a rapid contraction of total investments. In addition, privateconsumption growth is projected to fall in 2009. Public spending plans are likely to be reviseddownwards in the context of a budget revision, as revenue growth is sharply decelerating. Theforecast predicts a reduction of real GDP in 2009 with significant downside risks.FYRoMIn the last quarter of 2008 and in early 2009, the economy started to experience the indirect effects ofthe global slowdown, leading to a sharp drop of exports, capital inflows and investment. However,private and public consumption should support a domestically driven growth momentum. Overall,output is likely to drop by about ¼ per cent in 2009. This is nearly 5 percentage points lower thanexpected in the autumn forecast. The probably more favourable economic conditions towards the endof the forecasting horizon should lead to output growth by about 1½ per cent in 2010.TurkeyIn 2009, the economy is likely to be subject to similar synchronised shocks – export contraction,sharply reduced domestic demand and external financing constraints. Most recent data on exports,industrial production, capacity utilisation, bank lending and imports of capital goods all point to a deepcontraction in 2009. The economy is expected to shrink by around 3¾ per cent in real terms, but unlikeprevious recessionary episodes, it would not be triggered by a banking/financial crisis. The relative
  20. 20. Centre For European Studies FINANCIAL CRISIS WATCHsoundness of the banking system and the end of the inventory adjustment should lead to a 2¼ percent rise in real GDP in 2010.ChinaChina is in a better position to counter the negative consequences of the turmoil in the internationaleconomy than most other emerging markets, inter alia because the arsenal of policy instrumentsavailable is wider and deeper. In the run-up to the G-20 summit in November last year, the Chineseleadership announced a huge fiscal stimulus package amounting to RMB 4 trillion or around 13 percent of (2008) GDP. Given the very low debt level (18 per cent of GDP) China does have considerablemargin for fiscal policies. Given the focus of the stimulus package on infrastructure and constructionprojects, imports of commodities are likely to recover further in real terms in the course of 2009.JapanThe global financial crisis is now severely affecting the Japanese economy. External trade is stillcollapsing, corporate profits are being, eroded, confidence is low, financial market conditions aredeteriorating and a negative feed-back loop from real-economy weakness to the financial sector hasset in. In 2010, the gradual impact of policy measures implemented globally should also supportJapanese exports, which, in turn, should contribute to the resumption of manufacturing activity. All inall, GDP is forecast to contract by 6.1 per cent in 2009 and 0.8 per cent next year.RussiaFollowing the global economic downturn, Russia’s growth is expected to be negative in 2009 (-3.8 percent) and moderately positive in 2010 (1.5 per cent). Inflation should remain at double-digit levels,decelerating slightly from almost 14 per cent to around 10 per cent, as the fall in economic activity andthe reduction in commodity prices cushion the inflationary effects of the rouble devaluation. Thebudget is expected to swing sharply from a hefty surplus to large deficits, of respectively 6.5 per centand 2.7 per cent of GDP, due to the reduction in commodity prices and in economic activity, plus thelarge fiscal stimulus packages. Russia is also forecast to see a significant fall in both its trade andcurrent account surpluses in 2009 and 2010, to, respectively, 5.1 per cent and 6.3 per cent, and 1.4 percent and 2.7 per cent of GDP.USAThe economy is facing formidable headwinds over the forecast period. The labour market isweakening rapidly with payroll employment having contracted at an annual rate of 6 per cent over thewinter and no sign of deceleration yet. Job losses will feed into declining incomes and consumptionback into further redundancies. The downturn in trade and fixed investment has continued unabatedin the first quarter of 2009. It has been exacerbated by an acceleration of the destocking process. Onthe other hand, consumer spending has stabilised following a boost to disposable personal income inJanuary from some one-off factors. But this is unlikely to have been sufficient to prevent anothersignificant contraction of real GDP. <<Source: European Commission >>