Euro Area 2010: Signs of Recovery Amid Escalating Fiscal Woes |
First Quarter: Weak Growth Amid Signs of the Emergence of New Crisis
The euro zone did not have time to take a breather early in 2010 as economic dilemmas continued to trail it. After two consecutive quarters of growth achieved in the second half of 2009, the pace of progress continued in the first quarter of 2010 but at a moderate pace amid the emergence of a new crisis that has become the overriding concern of leaders in the region and it even was extended at the global level throughout 2010, which is the "European sovereign debt crisis."
The main focus throughout 2010 was on the sovereign debt crisis that was considered a challenge to the resilience of the euro-area economies against the repercussions of global financial crisis as well as the ability of governments to continue to support the weak economy.
In fact, signs of crisis appeared significantly in November 2009 when Greece announced its fiscal budget plan for the year in order to avoid falling into default which actually suggested its inability to meet its debt obligations. This drew the entire world’s attention to Greece on the grounds that this will threaten the monetary stability and unity of the euro area that might end up with its collapse.
The agony swelled as credit rating agencies cut credit rating for Greece such as what Fitch did in the month of December 2009 when it downgraded Greece's rating to BBB + from "A-" and this new classification means the inadequacy of the Greek debt. This downgrade was followed by other cuts by Standard & Poor's and Moody's rating agencies.
In light of the escalating risks that Greece -as a member of the euro area- may default, the government moved to declare strict austerity measures to reduce the huge budget deficit.
This deficit came as a result of the expansion of the Greek government in public spending, especially after the outbreak of the global financial crisis, in order to support its economy, but such a procedure did not coincide with revenues to cover expenses, especially in the wake of the deep recession that dominated the euro area for five consecutive quarters since the second quarter of 2008 as well as the fall of the Greek economy in sharp downturn throughout 2009 and the continuation of the contraction until the first quarter of 2010, recording -0.8%.
Thereafter, the Greek government announced it may resort to the International Monetary Fund (IMF) for help, which has increased criticism from the European Central Bank and underscored fears among investors in the market because such a move meant the euro area does not have solutions for crisis which raised speculations some euro-area economies may leave the European single currency.
Despite the negative impact of the sovereign debt crisis since late 2009 on the financial markets and investors’ confidence, it had positive impact on growth during the first quarter as the euro fell against the U.S. dollar by nearly 800 points as it slipped to March's closing of 1.3500 from January's opening at 1.4300, to drop about 6% in the first quarter, increasing competitiveness of European goods and services and thus pushed up the region's exports.
For the stock market, we noticed that European indices fell in January, consolidated in February before it rebounded in March. DJ STOXX 50 rebounded from a low of 2728 points in January to a high of 2942 points in March, German DAX 30 opened the month of January at 5996.3 till it closed at 6160.8 in March and the French CAC 40 started with 3806.0 points in January to end at 3975.0 in March.
Growth
The euro area has benefited from the weakness of the euro against the U.S. dollar during the first quarter as it supported the region's exports at the time where consumption and spending retreated.
Growth was 0.2% in the first three months of the year compared with 0.4% expansion in the fourth quarter of 2009. Annually, the euro area's growth reached 0.5% expansion for the first time since the third quarter of 2008 from the previous year’s 2.2% contraction.
Exports soared 2.1% from 1.8% in the fourth quarter, boosted by the high demand from emerging economies.
Till the first quarter, there was no effective reduction in public spending by governments since it rose by 0.2% in the first three months of 2010 to spur growth while it offset the decline in consumer spending and investment.
Household consumption dropped 0.1% and corporate investment plummeted 1.2% to give a sufficient explanation for the high unemployment rate during that period.
Furthermore, the first quarter witnessed very cold weather that was the harshest in 14 years which affected construction and reduced the pace of growth by nearly 2.3%, yet growth of the industrial sector due to improved exports reduced the decline in growth, as it added to the region's growth 1.9% which was reflected in expansion in manufacturing to 56.6, followed by 54.1 for the service sector, according to PMI gauge.
German GDP expanded 0.2% from the revised 0.2%, French GDP reached 0.1% from the revised 0.5%, and Spanish GDP came in at 0.1% from -0.1%.
Unemployment
As a byproduct of the global financial crisis, many companies continued to adopt policies to reduce costs including terminating workers amid the anemic demand domestically and worldwide.
Unemployment rate reached its peak in March to record 10.00%, the highest level since August 1998. Spain had the highest unemployment rate among euro-zone countries with 19.1% in the same month, followed by Ireland which recorded 13.2% then Portugal with 10.5%, while Germany recorded an unemployment rate of 8.0% showing some improvement compared with 8.1% at the beginning of the quarter.
Inflation
Rising commodity prices worldwide, especially energy products, led to the acceleration of prices in the euro area during the first quarter as consumer price index rose an annualized 1.5%, the highest level since December of 2008, as oil prices jumped by more than 66% in 2009 and by 16% in the first quarter.
Despite the rapid acceleration in prices, it did not prompt the European Central Bank to do any change in its monetary policy since the rate was still below the safe level of price stability set by the bank which is 2%. The ECB described the movements of inflation as quiet and inline with the bank's target amidst the low levels of consumption and expenditure as well as the weak labor market.
Movements of the European Central Bank
With regards to the monetary policy, the bank has kept interest rate unchanged at 1% after it lowered it to that level in May 2009, as the Bank considers that level appropriate for current conditions. For quantitative easing, policy makers also kept it without change to remain at $60 billion euros.
The bank continued withdrawing non-standard measures after ending 12-month loans in December 2009 as it announced at the end of the quarter the expiry of the 6-month loans operations.
Also, it stopped providing 3-month loans to banks at the benchmark interest rate and said it will adopt variable interest rate starting from April which was applied before the crisis. This was a part of a strategy to stop non-standard procedures in the market at a time when the bank found that the amount of liquidity form the banking sector is appropriate.
The bank also announced it will keep seven-day and one-month loans to banks until October 12.
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