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Economic Recovery Watch 19May 2010


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Economic Recovery Watch 19May 2010

  2. 2. Centre For European Studies ECONOMIC RECOVERY WATCH “Watchtower” The Euro Crisis: Is ‘More Europe’ the Answer? Foreword by CES Head of ResearchIt was probably the best-known series of jokes in communist-ruled Central and Eastern Europe:Questions to Radio Yerevan. The underlying principle was that a more or less serious listener’squestion was answered by: ‘In principle yes, but…’ – and what followed was a near total refutation ofthe assumption contained in the question. One is tempted to react like Radio Yerevan to the questionwhether more competences for the EU institutions are the proper answer to the Euro crisis: inprinciple yes, but please let’s preserve democratic legitimacy, subsidiarity and diversity, let’s becompletely realistic about the ratification chances of any changes in the Lisbon Treaty, and above alllet’s not forget that the root cause of this crisis is not deficit and debt in Greece and other SouthernMember States, or evil speculators, for that matter, but sluggish growth, inflexible labour markets,bureaucracy and high taxes all over the EU – only more so in the South.That means that, of course, the European Commission should indeed develop an early warning systemon national deficits. And of course it means that the Stability and Growth Pact’s teeth ought to besharpened – while being conscious of German and French sins, too, in waiving the criteria when thegoing got tough. And it certainly means more macro-economic coordination in the Council. If that iswhat is meant by better economic governance, then better it would be folly to reject it. But an EUeconomic government, with the Commission actually determining national budgets and even macro-economic policies, would not only fail in the ratification process – it would also be undesirable becauseinstead of tackling the root causes of the crisis, it would exacerbate them. The EU has three years tomeet the gravest challenge to date, to its currency and to its cohesion. Let’s not waste them onquestions to Radio Yerevan.
  3. 3. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 19/05/2010 To view full articles, click on hyperlinks.EU Member StatesAustriaAustrian People’s Party (ÖVP) Economy Minister Reinhold Mitterlehner has said that the depreciationof the Euro against the dollar in the wake of the Greek financial crisis was not totally bad: ‘Eventhough the Greek debt crisis has become a threat to Europe, the weak Euro will give exports additionaltailwind.’ He added that it was important for Austria to increase exports and prevent consumptionfrom declining. Regarding the impact of the Greek crisis on the Austrian economy, it has emerged thatGreece is deeply in debt with Austrian banks: the Bank for International Settlements (BIS), whichcoordinates regulations in the field of financial services to promote international financial stability, hasrevealed that Greece owes Austrian banks around €4.5 billion. Nevertheless, the Austrian banks haveensured they would not reduce investments, as declared by the Raiffeisenzentralbank (RZB) bossWalter Rothensteiner after a meeting with the heads of Austria’s other four major banks and theAustrian Finance Minister. RZB has later praised the €750 billion stabilisation package for Eurozonecountries in financial difficulty, saying that the package agreed by the finance ministers in Brusselsshould suffice to stop the spreading of financial infection in the Eurozone and ensure the refinancingof countries in trouble. This positive reaction is mirrored by public opinion, with 81 per cent ofAustrians supporting EU financial assistance for Greece, according to results of a new poll by theKlagenfurt Human Institute. On a different topic, new figures show that the Austrian economy failedto grow in the first quarter of 2010 compared to the last quarter of 2009, according to the Institute forEconomic Research (Wifo). More optimistic forecasts released by Bank Austria are predicting a growthspurt in the second quarter in the country, thanks in part to more optimism in the industry and amongconsumers.BelgiumEconomists have expressed concern that political paralysis in Belgium as it recovers from the globaleconomic crisis would harm the prospects of reducing the country’s budget deficit. ‘Until now we maysay that Belgium was off the radar screen of the financial markets, but this political crisis could bringBelgium back on to the radar screen of those shorting debt markets, speculators or otherwise,’ saidEtienne de Callatay, economist at Bank Degroof in Brussels, referring to the practice of trying to profitfrom a decline in an assets value. Letermes nine-month struggle to form his first government fuelledconcerns in the media at the time that Belgium could break apart and raised the risk premiuminvestors demanded to hold government bonds. In the banking sector, Franco-Belgian financialservices group Dexia SA reported a higher than expected first-quarter net profit, boosted by a one-off capital gain, and revealed its exposure to Greece. The company, kept afloat by a bailout and stateguarantees in late 2008, said in a statement that exposure to Greek sovereign debt was €3.7 billion,with little to no exposure to Greek banking, local authorities and corporates. It added its insurancecompanies had exposure to a further €1.2 billion of Greek sovereign debt, but this was less of an issuefor Dexia itself.
  4. 4. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 19/05/2010 To view full articles, click on hyperlinks.BulgariaAccording to a research of the Open Society and the World Bank, Bulgarian household incomedeclined by approximately 30 per cent and 21 per cent of Bulgarians live on the verge of poverty inBulgaria. Smaller income is said to be a result of job losses and reductions of salaries. Consequentlypeople try to limit their grocery, medical and educational expenses. Thirty per cent of Bulgarians saveon food and forty per cent on water and electricity. The most affected by the economic crisis is thegroup of low-qualified people and Roma minority. The Bulgarian Minister of Labour and Social Policysaid that even though the situation is bad in other sectors, employment in tourism and agriculture hasincreased. The country’s budget deficit reached 1.67 billion BGN in the first quarter of 2010 due to thedecrease in revenues and increased spending on social payments. Meanwhile, Bulgaria’s fiscal reservereached the level of 6.0 billion BGN at the end of April – first time since the beginning of the yearwhen revenues exceeded expenditures. The country is one of the seven EU member states that do notmeet all the conditions to adopt euro due to too large budget deficit. The European Commission setthese countries under the extensive deficit procedure that will ensure swift reduction of their statespending. Bulgaria’s general government deficit reached 3.9 per cent in 2009 which exceeded the EUlimit for overspending by 0.9 per cent. The deficit exceeded also government estimations of 3 percent.CyprusThere were a few encouraging signs of recovery in an otherwise problematic Cypriot economy the pastfew months. First was the Central Bank governor’s prediction that, after a small contraction of 1.9 percent in 2009, the economy would continue to shrink in 2010. The budget deficit rapidly increased to6.1 per cent of GDP for 2009, industrial turnover for January 2010 fell by 5 per cent, while annualinflation recorded a slight increase in April, to 2.44 per cent. Amidst these negative developments,there existed some reasons for slight optimism. There seemed to be a rebound in the all importanttourism industry, as well as a slight moderation of the pace of industry decline and unemploymentrise. Whether these signs point to the beginning of a very slow recovery though, is unclear.Czech RepublicThe priority for Czech Social Democrats (CSSD), if the party wins the 28-29 May elections, is to savemoney, perhaps 19 billion crowns a year, through a new reform on the system of public procurement.Social Democrats said earlier they wanted to gain an additional 29 billion crowns through cost-savingmeasures in the state budget. They want to save another 41 billion through changes in taxes anddividends. For the Civic Democratic Party (ODS), the top priority is the lowering of the state debt. TheODS promises the Czech Republic will have a balanced budget by 2017 if it rules the country. It wantsto reach the goal with the introduction of a ‘financial constitution’ that would anchor fiscal disciplinein legislation and cutting overhead costs of all ministries by 5 percent. This year, the Czech Republic´sbudget carries a large deficit of 163 billion crowns, or 5.3 percent of GDP. The ODS says it wants tokeep taxes and social insurance payments at the current level. On the contrary, the Social Democrats(CSSD) want to introduce progressive taxation. The ODS counts with measures in support of
  5. 5. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 19/05/2010 To view full articles click on hyperlinks.employment; it promises support to part-time jobs, work from home and employment of schoolgraduates and older people. The ODS pushes for a more targeted and stringent system of socialbenefits and a pension reform to which all revenue from possible privatisation would go. The ODSdoes not want to privatise teaching hospitals and health care insurance companies. This differs fromwhat some party representatives proposed in the past. The ODS wants to cut the number of ministriesby three to 15. On another note, Czech Prime Minister Jan Fischer has accepted the nominations forEuropean Bank for Reconstruction and Development (EBRD) vice president.DenmarkThe Danish people have been saving their money since the financial crisis started, but in March theyloosened their belts. Savings have been up 60 billion kroner since September 2008, seriouslyhampering consumer spending. Statistics Denmark found a sharp jump in retail sales with 2.9 per cent,but Danske Bank chief Economist Steen Bocian said that we should not count on the same kind ofjump in spending in the next few months. The financial crisis has also caused a serious increase of 26per cent in bankruptcies in April compared to the same period last year. Soren Overgaard Madsen ofthe credit analysis group Experian says that the figures are clearly at the high end of what we haveseen in the last decade and more than double of what one saw in 2008. Even though Denmark`sgrowth has slowed, it is still one of the most competitive economies in the European Union accordingto the World Economic Forum, ranking third in Europe behind Sweden and Finland. The DanishFinancial Minister Claus Hjort Fredriksen still believes that euro adoption is a good idea for hiscountry. He states that “Euro membership has a number of both political and economic advantagessuch as more political influence in Europe, small but certain economic benefits for citizens andcompanies”.EstoniaIn its Economic Outlook, Nordea is expecting the Estonian economy to grow 1.2 per cent in 2010 and4 per cent in 2011 based on stronger exports and entry into the Eurozone. This is modest compared tothe last couple of years with the main challenge being to bring down unemployment. The number ofunemployed persons increased by 30,000 in the first quarter of 2010 to 137,000 persons. According tothe Estonian Labour Force Survey, the unemployment rate now is 19.8 per cent. On a positive note,the international rating agency Fitch is prepared to upgrade Estonia`s sovereign ratings. This is due tothe European Commission’s recommendation that Estonia should be accepted into the Eurozone. TheEuropean Commissioner for Economic and Monetary Affairs Olli Rehn says that although recent data ispromising, Estonia’s bid to join the zone next year is still not a done deal. Before the report from theEuropean Commission, John Andrew from the Economist Intelligence Unit in London stated thatalthough Estonia is likely to meet the targets set by the commission, current zone members areexpected to take a more stringent approach due to the Greek crisis. There is therefore a risk that euroadoption could be delayed until 2012-13.
  6. 6. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 19/05/2010 To view full articles, click on hyperlinks.FinlandFinland as a member of the Eurozone is concerned with the Greece debt crisis; the Finnish EconomyMinister Mauri Pekkarinen said that the Greece Resolution is very important for the Euro. The FinnishPrime Minister Matti Vanhanen called on the European Union to be tough on Member Statesbreaching EU rules, stating that ‘unacceptable policies should lead to credible sanctions, be it fines orfreezing structural and cohesion payments (…) good money should not be thrown at bad economicpolicies.’ Naturally the Greek crisis creates a debate on whether it was a good idea for Finland to jointhe euro. Like its members in the Nordic region, Finland is performing well in the World EconomicForum’s (WEF) rating of competitiveness. According to WEF’s study Finland is the second mostcompetitive economy in the EU. Nokia, Finland’s largest company and the world’s biggest maker ofmobile phones, filled a patent-infringement lawsuit against Apple regarding their competitorsproducts called the iPhone and iPad. This lawsuit is the last one in a row and seeks an unspecifiedamount of cash compensation and an order that would halt Apple’s use of Nokia inventions.FranceThough first quarter economic growth in France was low (0.1 per cent), Christine Lagarde, the FrenchMinister of Finance, still expects the French economy to grow by 1.4 percent in 2010. Lagarde alsoexpects the French economy to grow by 2.5 per cent in 2011 and 2012, despite a downturn in thefinancial markets in the last two months. Inflation in France is also on the rise with statistics showinga 1.7 per cent rise in consumer prices, mainly due to increasing energy costs. It is believed that theslight rise in inflation is proof that the French economy is growing and allowing for increasedconsumer spending. With regard to the debt crisis plaguing the Eurozone, a poll commissioned by LeFigaro shows that there is support for bailout packages for fellow Eurozone members. The pollshowed that 69 per cent of people believed that the bailout of Greece was a good thing after it wasannounced that the French contribution to the bailout could reach €110 billion. Another indicator ofgrowth is an increase in part-time employment. According to recently released statistics, the numberof part time jobs has increased by 3.7 per cent in March 2010 and by 22.8 per cent in the precedingmonth. Despite the increase in part-time employment, unemployment increased by 0.5 per cent inMarch and the number of job seekers sits at 2,661,300 people.GermanyOn 11 May 2010, the German cabinet approved its €123 billion share of the Eurozone bailout packagefor Greece, with a provision of a 20 per cent increase on approval of the Bundestag budgetarycommittee. This approval comes on the heels of reluctance on the part of the German government tobailout Greece and the bailout has been largely derided by the Germany conservative press and theopposition Social Democrats. This approval follows close examination of the bailout package inquestion and possible alternatives to a large government bailout. Many in Germany question whetheror not this bailout will be of any use or if it will be a temporary fix. To ensure that Greece implementsthe austerity measures required to stabilise the Eurozone, it has been suggested by Jürgen Rüttgers,the Minister President of North Rhine-Westphalia, that a European Commissioner be sent to Athens toensure that spending cuts are made and that the accounting procedures are indeed accurate.
  7. 7. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 19/05/2010 To view full articles, click on hyperlinks.Domestically, the German economy remains stable and its debt rating from Standard & Poor’s hasheld at AAA.GreeceDespite the fact that the government hailed the Eurozone-IMF rescue mechanism put together on 25March as a big success, the reality in the financial markets proved much harder for Greece. Thecountry’s first bond issue after the agreement received a cool response from the markets, and itscredit rating was subsequently downgraded to ‘junk’ status, thus prompting the Greek government toofficially request assistance in April, first from other Eurozone members and then from the IMF. Thefinal rescue package was agreed upon on May 2 and was much larger than the original Eurozone-IMFmechanism envisaged. In the evening of 6 May, the Greek Parliament voted into law the austeritymeasures that were a precondition for Greece to receive the financial aid put together by the IMF, theECB and the Eurozone members. The measures focused on public sector wage and pension cuts, publicexpenditure reduction and an increase of VAT and other taxes. The vote was not without ramificationsfor political parties either, as three Members of the Parliament from the ruling Socialist party rejectedthe bill, while a leading conservative opposition Member of the Parliament approved it going againstparty line. All four were promptly ejected from their respective parties. News of unrest anduncertainty over the Greek government’s ability to implement the austerity package caused severelosses in world stock exchanges in the morning of 7 May, thus further deepening fears of contagion ofthe debt crisis to other euro-members. With parts of Greek debt maturing in May, the rescue packageshould allow Greece to stay afloat for the time being. Quarterly installments of the loan will be madeafter the EU reviews the effectiveness of the public expenditure-cutting measures. Nevertheless,some voices in Greece raised the issue of alleged inconsistencies between the harsh measuresimposed on Greece and the arguably laxer conditions included in the euro-support mechanism agreedupon on the weekend of 8-9 May for countries facing speculative attacks. With unemployment risingto a six-year high of 12.1 per cent and GDP expected to shrink by 4 per cent this year, the volatile mixof a struggling economy and social tension should be expected to keep uncertainty over Greece andthe euro high.HungaryHungary entered a new political era with the elections of 11 and 25 April 2010. The socialistgovernment was routed at the polls, as the main opposition conservative party of Viktor Orban, Fidesz,won an overwhelming two-thirds majority in the Hungarian Parliament. The new stable governmentwas hailed as a positive development for the further consolidation of the country’s credibility in worldfinancial markets. The Orban government is expected to build on the previous government’s austeritymeasures, which culminated in the Hungarian Central Bank MNB’s recent cut of its benchmark baserate by 25 points to 5.5 per cent in early April, in the planned curbing of the budget deficit down to 3.8per cent for this year, as envisaged in the agreement with the IMF and the EU, in the massivereduction of the current accounts deficit, but also in a hike in unemployment to 11.4 per cent, thehighest since 1994. Yet with the new government, new doubts arise: Fidesz leaders doubt that thenew government is really able to meet the 3.8 per cent goal this year. On top of that, they want to
  8. 8. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 19/05/2010 To view full articles, click on hyperlinks.renegotiate key terms in a new agreement with the IMF and the EU, the old one expiring in October2010. Viktor Orban is on a collision course with MNB governor András Simor, while it is still unclearhow he plans to implement his electoral pledges for tax reductions and more growth-geared policies.The release of surprisingly positive news that the Hungarian economy grew by 0.1 per cent in the firstquarter of 2010 for the first time after the third quarter of 2008 prompted the outgoing financeminister to insist that Hungary should be able to meet the 3.8 per cent deficit target, thus adding tothe uncertainty. This uncertainty, coupled with the Mediterranean debt crisis, may still have negativerepercussions in Hungary’s dealings with the bond market in the immediate future.IrelandThe Central Statistics Office announced that the rate of the annual consumer prices fall continued tomoderate in April 2010. The prices were 2.1 per cent lower than in the previous year. The ratereached 3.1 per cent in March and 3.2 per cent in February. Irish deflation reached the highest level of6.6 per cent in October 2009, and since then the rate of decline has fallen. Allied Irish Banks (AIB)announced that the governments stake in the bank would rise to more than 18 per cent since itincreased the holding rather than paying the state a dividend. The National Pension Reserve FundCommission was suppose to receive a dividend of €3.5 billion preference shares, worth €280 million.The European Commission had requested the bank not make discretionary coupon or dividendpayments on certain securities, due to setting up the restructuring plan. Therefore, the shares will beissued instead of dividends, and the NPRFC total ownership of AIB ordinary shares will rise to 18.61per cent.ItalyAccording the national statistics bureau Istat, Italys GDP increased by 0.5 per cent in the first quarterof 2010, over the last quarter of 2009, and was 0.6 per cent higher than the first quarter of 2009. Theincrease was led mainly by the agriculture, industry and services sectors. The bureau forecasts that ifthe current trend remains unchanged, Italys GDP for 2010 will rise by 0.6 per cent. At the same time,the International Monetary Fund predicts that the country’s GDP will reach a 0.8 per cent increase thisyear. The International Monetary Fund also expects to see a deficit of 5.2 per cent of GDP withinflation running at 1.4 per cent. The country’s deficit forecast is below the average for the 16-nationeuro area (6.8 per cent), but it is still better than in the Europes stronger economies: Germany (5.7per cent) and France (8.2 per cent). The OECD reports that Italian salaries are among the lowest of itsmembers. Based on the 2009 data, Italian salaries ranked 23rd in the 30-nation group and were 16.5percentage points below the OECD average. The country’s average annual salary in 2009 was $22,027.The OECD average reached $26,395 whereas in the euro area it amounted to the average of $28,454and $25,253 – in the EU. Italian salaries were also the lowest in the G7 Group and were even lowerthan in three countries currently facing financial turmoil: Greece, Spain and Ireland. However, theywere higher than salaries in Portugal, Czech Republic, Turkey, Poland, Slovakia, Hungary and Mexico.The salaries were the net average for a single-person household and based on purchasing power. TheOECD calculated that in the first quarter of 2010 the unemployment averaged out in Italy at 8.6 percent of the labour force (up 1.2 percentage points from the first quarter of 2009).
  9. 9. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 19/05/2010 To view full articles, click on hyperlinks.Latvia‘Latvia is coming out of the crisis,’ according to Ilmars Rimsevics, the Governor of the Latvian centralbank. At a contraction of 18 percent in 2009, the Latvian economy was one of the worst hit by thecrisis; however, the Latvian economy recorded growth of 0.3 percent in the first quarter of 2010.Despite the modest growth of the economy, unemployment went up. The rate of unemploymentincreased to 20.4 percent in the first quarter of 2010, up from 19.7 percent in the fourth quarter of2009. Enlargement of the Eurozone is also on the minds of Latvia leaders. There is a fear amongpoliticians, including Latvian Prime Minister Valdis Dombrovskis, that the crisis is Greece could furtherdelay the accession of the Baltic states to the Eurozone. The Latvian government has undertakingdecisive austerity measures and the recent approval of Estonia to the Eurozone indicates that theBaltics are on the way to recovery.LithuaniaThough the economic outlook for Lithuania is not stellar, it is improving. Danske Banke has adjustedits projections for the Lithuanian economy and now expects it to shrink by 2.2 percent rather than 2.9as previously predicted. This outlook can be contrasted with that of the Lithuanian government, whichexpects the economy to grow by 1.6 percent. Forecasts show that unemployment will increase to 15percent over this year before contracting to 14.5 percent next year. Like the Latvian leadership, thegovernment of Lithuania is fearful of the Greek debt crisis hurting their chances of adopting the eurobut at the same time are cautiously optimistic after the enlargement of the Eurozone to includeEstonia.LuxembourgThere is no reason for financial markets to panic as the Eurozone has shown commitments to fiscalconsolidation and the euro remains a stable currency, Luxembourg Finance Minister Luc Friedendeclared on 11 May. Frieden told Reuters Insider television that the euro is and will remain as a stablecurrency and that they have shown commitments to fiscal consolidation within the Eurozone, andtherefore there is no reason neither to panic nor overreact. The finance minister said he was notworried about inflation but said the Eurozone and the ECB must take the right action to make sure itdoes not become a problem.NetherlandsA majority of MPs have backed the EU and IMFs plan to bail out Greece during an emergency debateon Friday, 7 May. The Dutch contribution will amount to some €4.7 billion over three years; despiteinitial opposition, Christian Democrat and VVD MPs voted in favour of the plan. However, Dutchcentral banker Nout Wellink has said that the rescue package must be coupled with a stricterapplication of the Stability and Growth Pact rules. Countries such as Greece, Spain and Portugal needto put their budgets in order quickly to prevent the crisis from escalating, as the safety net provided bythe Eurozone has a temporary nature, Wellink said. Wellink, who is also a member of the Europeancentral banks governing council, called for tougher rules to govern the Eurozone Stability Pact. On adifferent topic, a parliamentary commission led by Socialist MP Jan de Wit has now completed the first
  10. 10. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 19/05/2010 To view full articles, click on hyperlinks.stage of investigating the support given by the government to banks and insurance companies overthe past few years. The report is highly critical of all players in the financial sector, be they bankers,regulators, Members of the Parliament, shareholders, companies or savers, with each group havingcontributed in its own way to the crisis. In particular, the report criticised former finance ministerWouter Bos and the central bank for not resisting the takeover and break-up of the ABN Amro empireor keeping the Icelandic internet savings bank Icesave at bay. A majority of MPs, including the CDA andVVD, believe that the next part of the investigation should take the form of a full parliamentary inquirywhich gives broader powers to the investigators. This would enable witnesses to be questioned underoath, unlike the case of the current parliamentary commission, which could not force witnesses toappear or answer questions, leading to criticism in some quarters.PolandThe Polish government accepted the outline of the budget deficit for 2011. It predicts GDP growth of3.5 per cent and inflation of 2.3per cent. The experts say that these will make the reduction of Polishbudget deficit to 3 per cent very difficult. The country needs to reach this threshold in order to adopteuro by 2012 whereas the current deficit reaches 7 per cent of GDP. The country looks increasinglyunlikely to join the euro zone within the next few years. The Greek crisis brought new uncertainty toPoland’s plans to adopt the common currency, and the prediction that it would enter in 2015 looksunreal. Prime Minister Donald Tusk announced that coming up with a schedule for euro adoption was“no longer a priority.” Foreign investments in Poland have improved but this is taking place slowerthan in 2009. Unemployment level decreased in March by 0.6 per cent reaching the level of 12.3 percent as a result of seasonal factors. 1.97 million people were registered as unemployed. According tothe former deputy president of the National Bank of Poland, Krzysztof Rybinski, the country’s economymay benefit from weakening of zloty in the wake of euro. Mr Rybioski said that a weaker złoty in factsupports Polish exporters, favors the sale of goods from our factories in Western European marketsand increases margins in exports. In effect, it helps the Polish economy emerge from a slowdown.PortugalIn Portugal, economic recovery is dogged by fears of the ‘Greek contagion.’ On 27 April 2010,Portugal’s debt rating was downgraded for the second time this year to BB+ with a negative outlook.As a result, Portuguese sovereign bonds are now considered the eighth-riskiest in the world and theirrisk premiums have doubled in the last month. At 77 per cent of GDP, Portugal’s public debt is not thehighest in Europe, however corporate and personal debt stands at 236 per cent of GDP, a figure that ishigher than in Greece and Italy. Furthermore, Portugal’s growth has stagnated. ‘The reason that we’reconcerned about Portugal is not because public sector debt ratios are excessively high, it’s more thatthe Portuguese economy doesn’t really grow,’ said Kenneth Wattret, the chief Euro region economistat BNP Paribas in London. GDP growth in Portugal has stood at less than 1 per cent per year in thelast decade. In response to calls for austerity, Prime Minister Socrates has pledged to cut budgetdeficits from the current 9.4 per cent of GDP to 2.8 per cent by 2013, though this may be hampered byhis lack of a parliamentary majority.
  11. 11. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 19/05/2010 To view full articles, click on hyperlinks.RomaniaRomania will not be able to adopt the euro by the 2015 initial deadline, as announced by LucianCroitoru, advisor of central banks governor. The central bank governor had recently declared that aslight delay in joining the euro area would be less harmful than moving to adopt the euro before beingfully prepared. Romanias target for the switch to the euro was set for 2014-2015. One contributingfactor to this situation relates to the country’s economic performance in the first months of the year,which was below expectations. The remarks come from the joint teams from the IMF, the EuropeanCommission and the World Bank which have been present in Bucharest for the fourth review ofRomanias performance under a €20 billion bailout loan signed last spring. Their findings are alsobacked by statistical data for the first quarter of 2010, which show that Romania is still in recession:first quarter gross domestic product shrank by 0.3 per cent in real terms compared with the earlierquarter. However, European Commission statistics predict that Romania will register economicgrowth of 0.8 per cent of GDP this year, while for 2011 the EC estimates 3.5 per cent economicgrowth. In a bleaker outlook, ING Bank analysts have warned that Romania may be in recession forthe rest of 2011, as ‘severe problems still persist.’ To counter these negative predictions, the countryhas told the International Monetary Fund (IMF) it will introduce measures regarding cuts in the publicsector. In the letter sent to the IMF, the government said it was committed to cutting the ‘13th month’salary paid to public sector employees. Other measures include taxing food vouchers, capital gains,plans to privatise or close down two state companies, freeze early retirement staring 1 June 2010, aswell as reducing the number of public employees to 1.29 million this year by laying off about 70,000employees. President Traian Basescu also announced that public sector salaries will be cut by 25 percent and pensions and unemployment aids, by 15 per cent, starting June. Romania has also promisedto keep the budget deficit under 7 per cent of GDP, in line with European accounting standardsSlovakiaThe economy grew in the first quarter of 2010 at a rate of 4.6 percent year-on-year in constant prices,according to the Slovak Statistics Office. Last year, Slovakia’s economy contracted by 4.7 percent afteryears of robust growth exceeding 6 per cent. However, economists also predict that economicperformance in the second half of the year might be affected by austerity measures if the governmentformed after the 12 June general election opts for belt-tightening policies. The first three months of2010 indicate that banks’ levels of profitability will be higher this year than last. In February alone, thesector’s profit rose 15 percent year-on-year. This is also because last year’s one-off cost factor – theadoption of the euro – will not be repeated this year. On the EU note, the European Commission hasgiven its approval for Slovakia to construct five highway sections stretching 75 kilometres under thecondition that solutions are prepared for overcoming any negative environmental impacts on sectionsof the highway which will traverse protected natural areas. Along with environmental concerns thathave been raised, the government’s strategy to build highways via public-private partnerships hasbeen accompanied by an intense debate over the price tags of the projects. Critics of the strategy saythe first package is overpriced and that the state would be much better off paying for this highwayconstruction through the state budget or by seeking European Union funds. After the EU financeministers agreed on providing a loan for Greece, three Slovak centre right parties (currently in the
  12. 12. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 19/05/2010 To view full articles, click on hyperlinks.opposition) initiated the extraordinary parliamentary session on the EU rescue package for Greece.However, the absence, on four successive occasions, of MPs from two of the ruling parties meant thatthe session had to be abandoned on 13 May.SloveniaAccording to the 2010 spring forecast, the Slovenian GDP declined by 7.8 percent in real terms in2009, largely attributable to the impact of the economic and financial crisis. The steepest decline,more than one fifth, was recorded for investment activity, which fell in all areas. Economic growth isprojected to be 0.6 percent in 2010, slightly below the autumn forecast (0.9 per cent). The economicrecovery, first seen in the second quarter of last year, will be slow, with possible fluctuations betweenquarters. The labour market situation is also not expected to be any better this year. Under theseassumptions, economic growth this year will mainly be based on higher foreign demand, amidsignificantly weaker growth stimuli from the domestic environment. With a gradual recovery in theinternational environment, exports are projected to increase by 4.3 percent in real terms. Thecontraction of economic activity was, albeit with some delay, followed by the tightening of labourmarket conditions, which will also continue this year. Employment dropped by 2.2 percent last year,most notably in manufacturing and construction. Total wage growth, last year still relatively high dueto significant wage increases in the public sector, is projected to decline somewhat this year. Last year,the private sector responded to deteriorating economic conditions by shrinking overtime hours andslowing wage increases. This year, the current account deficit will widen slightly again, after last year’ssignificant drop. The current account deficit, which had been strengthening in the period of favourableeconomic trends and high commodity price rises on world markets, shrank notably last year. Assuminga further revival of global trade and domestic investment and private demand, Slovenia’s economy willgradually recover in 2011 and 2012. The spring forecast of economic growth is 2.4 per cent for 2011and 3.1 percent for 2012. Growth is thus not expected to reach pre-crisis rates, which wereattributable to an exceptionally favourable international economic situation and high domesticconstruction investment coupled with relatively inexpensive liquidity on international and domesticmonetary markets.SpainSpain became the latest Eurozone country to announce sweeping austerity measures as theexecutive European Commission sought unprecedented power to pre-vet national budgets. PrimeMinister Jose Luis Rodriguez Zapatero has announced Madrid would slash civil service pay by 5 percent this year, freeze it in 2011, cut investment spending and pensions and axe 13,000 public sectorjobs in a drive to meet EU deficit targets. The announcement came two days after Eurozonegovernments, the European Central Bank and the IMF agreed on the rescue package to stabilise theeuro in exchange for pledges from highly indebted European countries to cut their deficits. Beforethese measures were announced, U.S. President Barack Obama had encouraged Spain to implementeconomic reforms, seen as critical to helping prevent a European debt crisis from stalling U.S. andglobal economic recovery. Obama called Prime Minister Jose Luis Rodriguez Zapatero to discuss the
  13. 13. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 19/05/2010 To view full articles, click on hyperlinks.importance of ‘resolute action’ by Spain, a country whose public finances, along with Portugals, havecaused the most concern after those of Greece. But the unions have reacted negatively to theausterity measures. The unions have proposed a public sector strike on 2 June to protest thegovernments plan to cut public sector wages by an average 5 per cent in 2010 and freeze wages in2011, and cut public investment spending by €6 billion.SwedenSweden remained the most competitive economy in the European Union, according to the WorldEconomic Forum study. The Swedish krona also remains one of the best performers among theworld’s most-traded currencies. While the number of bankruptcies in neighbouring Denmark is on itshighest level for decades, the number has fallen with 19 per cent in Sweden compared to last year.The unemployment rate is also falling for the first time since the crisis; there are now 1,847 fewerunemployed compared to the same time last year and the number of vacancies is also on the way up.Sweden will contribute SEK 1 billion to the Global Environment Facility (GEF). At the negotiations inParis, donors agreed to add $4.25 billion to the fund, which is an increase of 52 per cent compared tothe last replenishment. Sweden pledged a contribution of over SEK 1 billion.United KingdomThe UK trade deficit in goods and services reached £9.7bn. Over the first quarter of 2010, the volumeof British exports decreased by 1.3 per cent and imports rose by 2 per cent - mainly due to theincrease in imports of semi-manufactured goods and basic materials. The general widening of thetrade gap is mainly a result of the increased trade deficit with the non-EU partners. According to theOffice for National Statistics, the UK’s trade deficit widened to £3.7bn in March from £2.2bn inFebruary 2010. The figures show that despite the weaker pound the country is struggling to export itsgoods. The Bank of England governor, Mervyn King, stated that the UKs economy should thereforeconcentrate on exports, rather than relying on domestic consumption. This will be particularly difficultdue to the recent events in the Eurozone – UK’s main trade partner. Nevertheless, the UK economyhas just started to recover from recession. After a year and a half of contraction, GDP grew by 0.4 percent in last quarter of 2009. National output continued to rise in the first quarter of 2010 but by only0.2 per cent in late April. It is 5.6 per cent less than the peak level at the beginning of 2008.Nevertheless, the Treasury experts predict that the British economy will expand by only 1.3 per cent in2010. This situation will take place mainly due to the fact that the companies stop delisting at the ratethat exacerbated recession in 2009. Unemployment reached 2.5 million (8 per cent workforce) and isthe highest since 1996 and it is most likely to carry on rising.
  14. 14. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 19/05/2010 To view full articles, click on hyperlinks.WORLDWIDEBrazilThe Brazilian economy is partying like it is 2008 while the highly developed countries fight with thecrisis. The real GDP growth forecasts for 2010 have reached a brisk 6 per cent — the best performancesince 1986. It is not entirely positive news due to the risk of overheating economy and the possibilityof high inflation level. The Central Bank’s monetary-policy committee increased the SELIC benchmarkinterest rate by 75 basis points to 9.5 per cent and it will probably tighten much more in the followingmonths. The Brazilian boom is based on solid foundations of the constantly growing global demand forthe country’s farm exports, oil and iron ore. Millions of Brazilians triggered higher consumption –partly thanks to an expansion of bank credits. The country’s inflation rate creeps up from the 5.2 percent over 2009. It exceeded the target of the Central Bank set at 4.5 per cent as in services the figure isapprox. 7 per cent. It is, however, a far cry from the four-digits past inflation spirals.CanadaWhile the United States is still dealing with its recession, Canada is nine months into recovery.Canadian Minister of Finance Jim Flaherty thinks that the country’s strong performance is due to itsconservative financial system and the fact that because of the tight regulation, the banks were muchless willing to grant loans than their American counterparts. Thanks to that the house prices in Canadaremained unchanged resulting in volume and value of Canadian home sales hitting record highs. E.g. ahouse in Ottawa listed at $435,000 sells for $600,000. Higher prices on the real estate markettriggered the increase in the construction industry as well as furniture and building materials sellers.The country’s energy industry has gained importance as the new investments planned for Alberta’s oilsands. Sinopec, a Chinese oil company, announced last month that it would pay $4.65bn for a 9 percent stake in Syncrude Canada, the largest operator in the sands. This investment comes at anopportune time since the Province of Alberta recorded a budget deficit in 2009, its first since the rapidincreases in crude oil prices since 2003.ChinaChinese inflation accelerated in April as a consequence of an increase in house and food prices andthe rise in bank lending. This raised concerns that the third-largest economy in the world mightoverheat and raise interest rates. According to the country’s statistics bureau, prices in April 2010were 2.8 per cent higher than in April 2009, the highest rate in 18 months. However, some experts stillthink there is no danger of an increase in interest rates because of the debt crisis all over Europe aswell as fragile international economy. The Chinese economy grew 11.9 per cent (annual rate) in thefirst quarter of 2010 triggered by Beijings 4 trillion yuan stimulus package.
  15. 15. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 19/05/2010 To view full articles, click on hyperlinks.UnitedcStatesThe US trade deficit increased in March to the highest level in 15 months thanks to the increase inimports as the corporate and consumer demand is rising. According to the Department of Commerce,the gap between imports and exports rose 2.5 per cent to $40.4 billion. Imports of goods and serviceswere up 3.1 per cent to $188.3 billion in March, while exports rose 3.2 per cent to $147.87 billion –dampened by the fiscal crisis in Europe. The trade deficit with the EU rose to $7.1billion in March (32.7per cent jump). Official figures show that the whole US economy grew at an annual rate of 3.2 percent in the first quarter of 2010 (5.6 per cent in the fourth quarter of 2009). The slower growth wascaused by the reduction of government spending and a decrease in exports. President Barack Obamais convinced that the US is moving in the right direction and that the latest figures were ‘an importantmilepost on the road to recovery.’ At the same time, the government posted its 19th consecutivemonthly budget deficit which is the longest shortfall ever.VietnamOn 15 April, a new State Bank of Vietnams decree came into force barring independent agenciesfrom rating banks unless they meet numerous conditions. This was the result of a report published bythe VietnamCredit – the country’s only independent credit rating agency. The report gave low remarksto the largest state-owned banks. The government’s reaction to that publication raised questionswhether Vietnam is ready to accept the freedom of commercial information. The Vietnam BankingAssociation claims that the report included data from 2008 when the banks were struggling with theglobal financial crisis instead of using the 2009 data in the better market conditions. Consequently, theState Bank barred VietnamCredit from marketing. Soon, a circular will be published in order to laydown the new rules for credit-rating agencies. According to these regulations the agencies would haveto obtain the assent of at least 20 banks to act as their exclusive rating agency and they would have tobe headed by the graduates of the Banking University. VietnamCredit’s Le Dinh Quan said thataccording to this draft decree, it seems like there will be only one organisation that can do creditratings. And that’s the organisation that prepared the draft decree.INSTITUTIONSEuropean Parliament: On 14 April 2010, the European Parliament organised a public hearing onthe Greek fiscal crisis. In this hearing, Olli Rehn, the European Commissioner for Economic andMonetary Affairs and Gerald Corrigan, Chairman of Goldman Sachs were asked a variety of questionson the role the way forward. The general feeling gained from the questioning of the Commissionerwas that there was a need to strengthen the Stability and Growth Pact, but in a way that feel short ofexpelling Eurozone members that did not comply. A delegation of MEPs returned from Athens inearly May after conducting a fact-finding mission. Their findings were that although it was fair that theEU demand guarantees from the Greek government regarding improving the state of public finances,there was a feeling among average Greeks that they were being accused of creating the economic
  16. 16. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 19/05/2010 To view full articles, click on hyperlinks.problems in the first place. Finally, on 17 May 2010, the Economic and Monetary Affairs Committeewas set to vote on the text proposed by the European Commission to further regulate the hedgefund sector. The proposal includes the creation of the European Systemic Risk Board to oversee thefinancial system and provide warning of an impending crisis and possible solutions.European Commission: Commissioner for Internal Market and Financial Services Michel Barnierhas called for compromise ahead of a likely vote on EU hedge fund regulations. The attempt toincrease regulations on what can be described as a little-understood part of the financial sector hasmet with fierce opposition from the City of London. Most importantly, however, the EuropeanCommission José Manuel Barroso has released the European Commission priorities for the upcomingG20 Summit in Toronto. In general, the Commission’s priorities include negotiating a global strategyto exit the crisis as has already been developed in the EU and to ensure that the global deal matchesthe objectives set out in the Europe 2020 Strategy last month. President Barroso said, ‘The events ofthe past weeks have again exposed just how interconnected markets and economies around the worldhave become. The G20 remains a key vehicle for the EU to drive forward a reform agenda whichtackles the challenges exposed and which commits our international partners to deliver too. Recoveryfrom the crisis and a shift to sustainable, responsible, growing economies and markets are sharedgoals that can only be delivered by a shared global effort.’EPP ViewsThe EPP has strongly endorsed the measures undertaken by the Council of Ministers to stabilise theEurozone, though there still remains much to be done. Joseph Daul, the Chairman of the EPP Group inthe European Parliament has said that we should ‘now expect the European Commission to ensurethat the Member States make the Stability Pact their main priority. Each Member State must, as soonas possible, revert to the Pacts criteria and take the appropriate budgetary measures to do so.’ Inaddition, José Manuel García-Margallo, Vice Chairman of the Economic and Monetary AffairsCommittee of the European Parliament, has said that the EPP will now fight for the creation of a realEuropean system of financial supervision to help avoid a future crisis on this scale. Margallo went onto call on the Spanish Presidency to push the ECOFIN Council to be more proactive and establishmeasures that keep the EU from being in a damage-control mode.OUR COMPETITORS’ VIEWSS&DOn 6 May 2010, the S&D Group proposed the creation of the European Systemic Review BoardEuropean Systemic Review Board to supervise the financial markets of Europe. This body would belinked with the European Central Bank, though the main organs would be composed of externalexperts that would assess the risks of systemic crisis in the EU. Martin Schulz, the Chairman of the S&DGroup in the European Parliament condemned the leaders of Europe for the amount of time that it
  17. 17. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 19/05/2010 To view full articles, click on hyperlinks.took for them to approve a bailout plan for Greece, saying that this delay was even more apparentwhen this is compared with the amount of time that it took for national governments to bailout theirfinancial institutions. The S&D Group applauded some of the measures in the Europe 2020 Strategybut warned that the Europe should not engage in systemic spending cuts but should rather increasesmart investments to strengthen the European economy.FROM THE BLOGOSPHERE…Europe is unprepared for austerity. Gideon Rachman comments on the remaining problems after the€750bn bail-out for the euro.Wheres the outrage? The Economist’s Free Exchange blogger wonders if Washington should be moreconcerned about the US joblessness.An ever-closer Union? Stephanie Flanders elaborates on the future of the Eurozone.Editor: Roland FreudensteinffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffResearch Assistance: Katarína KrálikováccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccAdditional Assistance: Angelos Chryssogelos, Diana Wasilewska, Ioana Lung, Giovanni Mastrobuono,Stian KarlsenDesign: José Luis FontalbacccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccQuestions and comments: