Europe Faces Recession Risk

November 2, 2011Marketsby EW News Desk Team


Even as the threat of a eurozone wide financial meltdown tempers down, the risk of a European recession remains high, bringing about fresh concerns over the consequences for global growth and trade flows.

Several institutions have warned of the increasing risks of a European recession, days before the summit of G20 nations in Cannes.

Advanced economies are looking at two years of weak growth and high unemployment and the outlook is likely to worsen unless Europe reins in its sovereign-debt crisis, the Organization for Economic Cooperation and Development said Monday, as it slashed next year's growth prediction for the U.S. and the eurozone.

In an update of economic forecasts timed to coincide with this week's G20 meeting, the OECD said "patches of mild negative growth" are likely in the eurozone in 2012.

It predicts economic growth in the eurozone will stall at 0.3 percent next year, after just 1.6 percent growth this year. That figure is down from the OECD's forecast in May of 2 percent growth in the eurozone in 2012.

Eurozone crisis measures unveiled last week "go in the right direction," but “detailed information is needed" on how the EU will implement the package of measures announced last week aimed at resolving the European debt crisis, the Paris-based OECD said.

UBS has also cut its euro-area and U.K. economic growth forecast for 2012 and predicts a recession in mainland Europe next year, citing a tightening in credit conditions. According to their estimates, gross domestic product in the eurozone will probably grow 0.2 percent next year, compared with a previous estimate of 1 percent.

The deal European leaders reached last week was intended to defuse the continent’s debt crisis and avert a financial meltdown like the one that nearly toppled the United States financial system in 2008.

But many have warned that while the markets initially cheered the debt breakthrough, doubts remain over the short-term future of the eurozone. Even if it provided some temporary relief, the pact did nothing about other threats to Europe’s economy: deep cuts by over-indebted governments, high unemployment, stingier bank loans and falling exports.

As Canadian finance minister Jim Flaherty said on Tuesday, "Europe is going through a very difficult time. It may well be in - or entering into – recession."

Jacob Funk Kirkegaard, a research fellow at the Peterson Institute for International Economics, agrees.

“We are not going to have a disorderly Greek default. We are also much less likely to have a large European bank collapse suddenly,” Kirkegaard told the AP, adding that he expects the continent to slip into a mild recession late this year or early next year, though its strongest economy Germany may escape a downturn. 

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