Rising from crisis:

Europe racing against time

Europe is pulling clear of recession but now faces a long fight to unplug itself from Government funded life support as it struggles with extra debt, a strong euro and an ageing population.

A survey this week of analysts’ notes on hurdles ahead for European economies pinpoints a paradox: with each move toward recovery they begin a race against time to put growth, employment and public finances in step.

The urgent task now, say analysts at Dutch bank ING, is to start planning for what they call a “rebalancing from public to private spending.”

In remarks consistent with the broad tenor of analyst comment, they say: “Eurozone Governments are likely to continue to stimulate their economies next year, but the exit from fiscal stimulus cannot wait too long.”

In a specific warning about another looming crisis, they warned that “the future costs of ageing will soon turn from theory into reality and many European countries are far away from a sustainable public finance position.”

ING economists acknowledge that government spending rigour is unlikely to come before 2011. But come it must if countries are to cope with the needs of their elderly.

Age-related spending in the eurozone could rise by more than 5.0 percent from 2010 to 2060, with countries such as Greece, 16 percent, and Slovenia, 12.7 percent, looking at double digit increases, according to ING.

“At present no single eurozone country could cope with the costs of ageing without permanent adjustments to public finance.

“Ageing is a genie which cannot be put back into the bottle. Its fiscal cost cannot be neglected or ignored.” The 13 biggest countries in the European Union have allocated almost 90 billion euros (133 billion dollars) in tax cuts and fiscal spending this year to stimulate growth, complemented by nearly 230 billion euros in credits to consumers and producers, according to a study by the European economic research group Bruegel.

But every bit as threatening to the financial health of Europe is the long-term debt, and the interest charge, that could be the legacy of anti-recession stimulus spending.

The eurozone’s executive commission has warned that the bloc’s debt level could reach 100 percent of gross domestic product by 2016, up from 69.3 percent at present.

In France’s new budget public debt is projected to soar to 84 percent of GDP in 2010, while in Germany finance minister Wolfgang Schaeuble said that if the government wanted to reduce its debt to 60 percent of output (in line with EU rules) by 2020 the economy would need to grow 4.5 percent a year.

The current German government of Chancellor Angela Merkel has made clear that its immediate priority is growth at the expense of more budget deficit and debt, principally by means of tax cuts.

However, some analysts in Germany say that the programme may also carry the seeds of structural reform to strengthen the medium-term growth potential of the economy.

That would help the government on the path to meeting a recently passed law requiring zero deficits by 2016.

“We made the decision to take a path fully directed towards growth, with no guarantee at all that it will work, but which offers the chance that it will work,” Merkel said last Monday.

“By saving, saving, saving I see no chance of success.” However, after an outcry over the possible consequences for the deficits, she moderated her remarks.

Yet another cloud on the horizon is the eurozone single currency, the euro, which has lately been gaining steadily against the dollar, a trend that if unchecked could hamper European export earnings and stifle recovery.

The dollar paradoxically tends to weaken when there is good news from the US economy and prospects brighten on the world scene. Under such circumstances, investors are emboldened to branch out into currencies such as the euro that are seen as riskier than the dollar.

The euro is now being traded near 1.50 dollars.

“In the short-term,” said UniCredit Group chief economist Marco Annuziata, “I expect the euro will move even higher and the pain will get stronger.”

The effect of the appreciating euro “will start hitting the recovery at its most fragile juncturem six to nine months from now.”

European policmakers, he added, are saddled with “a frustrating impotence,” as the European Central Bank, its interest rates near zero, has run out of its traditional ammunition.

The bank can no longer slash rates as a means of discouraging investors, whose appetite for the single currency boosts its value.

But some economists caution against exaggerating the negative effects of a strong euro.

A strong euro reduces the cost of critical dollar-denominated commodities such as oil and, by lowering the price of imports, acts as a brake on inflation.

Europe finally is facing a another painful spurt in unemployment, according to researchers at Morgan Stanley, who foresee the jobless rate in the eurozone rising from its current level of 9.6 percent of the workforce to 10.7 percent in the second half of next year, with new entrants finding it espcially hard to land a job. AFP