Are the global economies ready for a slow and painful 2012? According to the Organisation for Economic Co-operation and Development (OECD) the European Union is likely to face a recession next year. The world’s largest single market, which accounts for approximately 30 per cent of global gross domestic product, is far out of anyone’s economic and financial comfort zone and European governments have not addressed this catastrophe in any assuring way.
We have never been so close to the complete fall down of the EU- Karl Micallef
Economic slowdown within the European Union will undoubtedly negatively impact the vast majority of the rest of the world. There could likely be both a direct and indirect contagion on global economic performance. The EU’s direct impact is rooted in lower demand for goods and services. With Europe having less money to spend, demand for exports from around the globe will fall. The US is definitely not immune to the potential fallout of a European recession. Although there seems to be some signs of recovery underway in the US, this is very weak and therefore a recession in Europe at this point would definitely be a problem.
Furthermore, the current economic health record in Europe is already being reflected in a weaker euro making it harder for non-European manufacturers to export into Europe. Their products and services would be relatively more expensive than those made within the EU. In addition, investment opportunities are becoming more attractive outside of Europe from both a risk and return perspective. This would result in investors selling the euro causing greater downward pressure on the European currency.
China is not insulated from this scenario either; the European Union is China’s largest trading partner. A slow or no-growth scenario within EU would result in lower demand for exports “Made in China” and would therefore cause factories to close and jobs to be lost. The greatest concern in China is not the actual financial performance of China but the actual state of mind of the Chinese. This is a psychological issue to deal with to which no proven econometric formula exists. Beijing is wary of this and will go through great lengths to try and avoid social unrest.
To some extent, China can spend its way out of this situation. China is known to be a nation of savers and therefore the current government can afford to adopt economic models which encourage increased corporate and consumer spending. However, China’s level of domestic consumption is unlikely to change any time soon. In addition, China is one of Australia’s biggest trading partners and hence the Euro-China impact would also impact this continent.
Additionally South America and Africa will definitely be hurt by slowing demand from Chinese manufacturers as a result of a European recession. Unsurprisingly, other Central and Eastern European nations that are not part of the eurozone are highly reliant on their Western European neighbours and will also be negatively impacted by lower exports.
Beyond the impact on global trade, there also lies the indirect and potentially greater problem; difficulties in Europe could lead to new instability within the international financial system which would restrict access to credit and choke any chances of economic growth. A European banking crisis could trigger new uproar in financial sectors around the world, including the US. Concern is already reaching levels last seen in 2008, when Lehman Brothers collapsed and the global financial crisis began.
European leaders need to act fast. They need to collectively decide what the action plan is, communicate it to the market and start executing. It is not an easy situation to address as no short term solution exists. Trying to accomplish everything at once in a matter of days is not only hard but is self-defeating.
The global contagion this collapse could witness is either too difficult to forecast or too scary to imagine. The clock is ticking and we have never been so close to the complete fall down of the European Union as we are today.
This article is the objective and independent opinion of the author. The information contained in the article is based on public information. Any opinions that may be expressed here above should not be interpreted as investment advice, nor should they be considered as an offer to sell or buy an investment. The company and/or the author may hold positions in any securities that might have been mentioned in this report. The value of investments may fall as well as rise and past performance is no guarantee of future performance. Curmi & Partners Ltd are members of the Malta Stock Exchange and licensed by the MFSA to conduct investment services business.
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Mr Micallef is an executive director at Curmi and Partners Ltd.