Europeans had assumed they would be largely immune to the American financial crisis. Not any more.
Europeans had assumed they would be largely immune to the American financial crisis. Not any more. Economists now expect another quarter or two of negative growth. They say interest rate cuts - the European Central Bank (ECB) raised rates in July - and economic stimulus packages are all but certain.Economic recovery, in other words, has been put on hold. And there's a potential monster stalking the euro zone: fear of a bank collapse.Shares in Fortis NV fell sharply yesterday amid continuing worries about the solvency of the Dutch bank and insurance company.Fortis denied having any problem "concerning solvency and liquidity," spokeswoman Lililane Tackaert said. Fortis shares fell 20 per cent in Amsterdam to €5.61 ($8.47) yesterday. This year they have lost two-thirds of their value.Also yesterday, Ireland had the dubious honour of becoming the first euro zone country to officially confirm it was in recession. Irish GDP shrank 0.5 per cent in the second quarter, after a 0.3-per-cent slide in the previous quarter. Plummeting house prices triggered the contraction.Even absent a bank failure, the mood in the euro zone is darkening. On Wednesday, the three biggest economies in Continental Europe - Germany, France, Italy - reported sharp falls in business confidence in spite of the 30-per-cent drop in oil prices since July and the apparent easing of inflationary pressures."The absence of any rebound [in business confidence] in September casts serious doubt on the possibility for the euro zone to avoid a second quarter of negative GDP," Gilles Moec, European economist for Bank of America, said in a note.
The results of the latest euro zone purchasing managers' index, released early this week, indicated the region had probably fallen into technical recession. The index showed that private sector output, which covers services and manufacturing, fell for the fourth consecutive month. The business confidence and purchasing managers' data come as a blow to the ECB and its merry forecasts. Until the U.S. financial crisis, the central bank had argued that growth would return in the fourth quarter, after a weak third quarter.As the European economy slows, the pace of layoffs in is accelerating. Yesterday, French auto giant Renault announced it would eliminate 2,000 jobs at its European subsidiaries. In Italy, Alitalia risks shedding thousands of jobs as the airline tries to find a new buyer.While the economic mood is definitely gloomier in the euro zone, few economists expect a severe, drawn-out recession. Europeans are generally less indebted than Americans. Britain aside, mortgages were not handed out to Europeans like newspaper flyers. In Italy, for example, it's hard to get a mortgage for more than 50 per cent of the value of a property.Europe also comes equipped with strong "automatic stabilizers." When economic activity slows, taxes go down as people move into lower tax brackets. Subsidies, such as employment benefits, go up. This cushions the blow of a downturn. The OECD says Europe's automatic stabilizers are three times more effective than those in the United States because of the stronger role of European governments in their economies.
Mr. Moec also notes that the euro zone's labour markets have become much more flexible over the past decade. Costs are easier to control because they can hire and fire more readily."Over all, I don't think we will have a prolonged recession," he said. "But we will see stagnation in the third and fourth quarters."
And the ECB has room to manoeuvre if things deteriorate quickly. Most European economists expect an interest rate cut in the first or second quarters of 2009.All bets are off if the European banks unravel. Two have already disappeared. Early this year, Britain's Northern Rock, a mortgage lender, was nationalized. Last week, HBOS, a Scottish bank with vast exposure to the ailing British housing market, was bought by rival Barclays. So far, no big banking name on the continent has succumbed to the American-bred credit crisis.The Europeans like to think their banks are healthier than the American ones. This may or may not be true - it's too early to tell. What is certain is that the failure of a big bank could put the short-and-mild recession theory to the test."If a major European bank were to collapse, it would significantly increase the risk of a serious recession," said Marco Annunziata, chief economist in London for UniCredit, Italy's largest bank. Economists are divided about the chances of a euro zone bank catastrophe. Mr. Moec, and others, think the chances are remote because their hunt for profits did not reach the manic and reckless intensity of the American banks and investment firms. In fact, the euro zone banks are yet to pull back on lending, though this could change as the American financial crisis saps confidence.
One pessimist is David Rosenberg, chief North American economist for Merrill Lynch and the man who has been saying for years the excesses of subprime mortgage lending would lead to disaster. While he does not specifically cover the European markets, he said: "I actually think Europe and its banks are in at least as bad shape [as the United States]." Coming from someone who has achieved guru status, this means something.
Several factors point to potential hard times ahead for the European banks. The first is the level of writedowns. The global figure is about $520-billion (U.S.). Mr. Annunziata of UniCredit said everyone assumes the American players took the vast majority of the writedowns. In fact, about 45 per cent of the total was taken by the Europeans.
The results of the latest euro zone purchasing managers' index, released early this week, indicated the region had probably fallen into technical recession. The index showed that private sector output, which covers services and manufacturing, fell for the fourth consecutive month. The business confidence and purchasing managers' data come as a blow to the ECB and its merry forecasts. Until the U.S. financial crisis, the central bank had argued that growth would return in the fourth quarter, after a weak third quarter.As the European economy slows, the pace of layoffs in is accelerating. Yesterday, French auto giant Renault announced it would eliminate 2,000 jobs at its European subsidiaries. In Italy, Alitalia risks shedding thousands of jobs as the airline tries to find a new buyer.While the economic mood is definitely gloomier in the euro zone, few economists expect a severe, drawn-out recession. Europeans are generally less indebted than Americans. Britain aside, mortgages were not handed out to Europeans like newspaper flyers. In Italy, for example, it's hard to get a mortgage for more than 50 per cent of the value of a property.Europe also comes equipped with strong "automatic stabilizers." When economic activity slows, taxes go down as people move into lower tax brackets. Subsidies, such as employment benefits, go up. This cushions the blow of a downturn. The OECD says Europe's automatic stabilizers are three times more effective than those in the United States because of the stronger role of European governments in their economies.
Mr. Moec also notes that the euro zone's labour markets have become much more flexible over the past decade. Costs are easier to control because they can hire and fire more readily."Over all, I don't think we will have a prolonged recession," he said. "But we will see stagnation in the third and fourth quarters."
And the ECB has room to manoeuvre if things deteriorate quickly. Most European economists expect an interest rate cut in the first or second quarters of 2009.All bets are off if the European banks unravel. Two have already disappeared. Early this year, Britain's Northern Rock, a mortgage lender, was nationalized. Last week, HBOS, a Scottish bank with vast exposure to the ailing British housing market, was bought by rival Barclays. So far, no big banking name on the continent has succumbed to the American-bred credit crisis.The Europeans like to think their banks are healthier than the American ones. This may or may not be true - it's too early to tell. What is certain is that the failure of a big bank could put the short-and-mild recession theory to the test."If a major European bank were to collapse, it would significantly increase the risk of a serious recession," said Marco Annunziata, chief economist in London for UniCredit, Italy's largest bank. Economists are divided about the chances of a euro zone bank catastrophe. Mr. Moec, and others, think the chances are remote because their hunt for profits did not reach the manic and reckless intensity of the American banks and investment firms. In fact, the euro zone banks are yet to pull back on lending, though this could change as the American financial crisis saps confidence.
One pessimist is David Rosenberg, chief North American economist for Merrill Lynch and the man who has been saying for years the excesses of subprime mortgage lending would lead to disaster. While he does not specifically cover the European markets, he said: "I actually think Europe and its banks are in at least as bad shape [as the United States]." Coming from someone who has achieved guru status, this means something.
Several factors point to potential hard times ahead for the European banks. The first is the level of writedowns. The global figure is about $520-billion (U.S.). Mr. Annunziata of UniCredit said everyone assumes the American players took the vast majority of the writedowns. In fact, about 45 per cent of the total was taken by the Europeans.
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