His warning comes in the wake of remarks made by the governor of the Bank of England, Mark Carney, who claimed that stagnation was affecting Europe’s prospects for economic recovery. His observations would seem to echo those of IMF Managing Director Christine Lagarde. Speaking at the G20 Summit in Brisbane, Australia, Ms Lagarde said that high debt, sluggish growth and unemployment may become the “new normal in Europe.”
In the same article that Mr Cameron wrote for the newspaper, the Prime Minister added,
“The eurozone is teetering on the brink of a possible third recession, with high unemployment, falling growth and the real risk of falling prices too. Emerging market economies which were the driver of growth in the early stages of the recovery are now slowing down. Despite the progress in Bali trade talks in 2013, global trade talks have stalled while the epidemic of Ebola, conflict in the Middle East and Russia’s illegal actions in Ukraine are all adding a dangerous backdrop of instability and uncertainty.”
While Mr Cameron’s concerns could also be tied to his prospects for re-election, his fears seem to be valid. Germany, Europe’s manufacturing powerhouse grew by just 0.1% in the third quarter pointing to anemic economic growth. A survey conducted by the European Central Bank showed that inflation would remain at very low levels, a situation that would inhibit growth in the bloc. The annual inflation rate in the Eurozone was projected to stand at 0.5% in 2014, which is well below the target rate of 2%.
An inflation rate of between 1-2% is considered to be a desirable target. One of the principle reasons has to do with real wages. In a healthy economy, market forces may require that businesses reduce real wages. Theoretically, a 2% wage increase in a year with 4% inflation has the same effect to an employee as a 2% wage reduction in a time of zero inflation. However, since workers will generally not accept pay cuts, most economists tend to concur that keeping inflation to between 1-2% is beneficial to the economy.
Mr Cameron’s fears also come in the light of the EU’s decision to impose sanctions against Russia. The sanctions may have the effect of driving Russia into a deep recession. Lately, Russia has taken a hit from the poor performance of its economy, driven by low oil prices on international markets and a weakening currency.
Europe is heavily dependent on Russian oil, and the sanctions the EU is planning to impose on Russia may hurt both Europe and Russia. The greatest effect would be on Germany, Europe’s industrial powerhouse. More than 6,000 German companies are doing business in Russia, and the sanctions on Russia would leave these companies badly exposed. In addition, Germany depends on oil supply from Russia. It is estimated that a one-third slash in oil supply from Russia would contract the German economy by up to 1.5% within the first year.
The EU also has some internal crises to grapple with that may impede growth even further across the Eurozone. Voters are putting plenty of anti-EU parties in power. In Mr Cameron’s Britain, the UKIP won 27% of the vote at the last election. Across the channel in France, the far-right National Front won a telling quarter of the vote whereas in other places such as the Republic of Ireland there has been a shift in voting patterns in favor of independents. Other countries such as Austria, Italy, Finland and the Netherlands have also seen growth in the parliamentary strength of anti-EU parties.
The consequences for businesses could be huge. If individual members were to decide to leave the EU, each country would have to renegotiate its rules for cross-border trade and investment. It could become a long and drawn-out process that would affect growth save for a few countries like the UK. In addition, the costs of labor would go up as it is likely that countries would tighten up their immigration laws. Higher labor costs would make it difficult for companies in some countries and sectors to remain competitive in the global market, especially when weighed against other emerging markets.
There are no easy answers to avoiding the oncoming global recession. Already as I write this article reports are coming in that Japan, the world’s third-largest economy has already plunged into recession. The G20 however seems to believe that it may have the answer.
At the close of the summit in Australia, it has come up with an action plan. Included in the action plan is a commitment to achieve a global growth rate of 2.1% over the next five years, measures to avoid tax evasion by big corporations, and a commitment to strengthening global financial institutions. In addition, the G20 also wants to see a lower unemployment rate. Most of the growth would come from investment in infrastructure and bringing in as many as 100 million women into the global workforce.
As the proposals are not binding on governments, it remains to be seen how far G20 countries will go in implementation. However, critics point out that what governments need to be focusing on is in creating quality and secure jobs. Ultimately governments will have to create conditions that enable small businesses thrive. They will also want their citizens feel the recovery something that has been lacking even in Mr. Cameron’s Britain.
What do you think of the state of European affairs and the possibility of a new recession? Comment below!
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Last modified (UTC): November 17, 2014 19:33