Friday, August 15, 2008

Euro Economy First into Recession

The Eurozone economy shrank by 0.2% in the second quarter of 2008. This is the first time the economy has contracted since the introduction of the Euro in 1999. If the economy shrinks in the next quarter, the Eurozone will have officially entered a recession. It is likely the Eurozone will be the first major economy to enter recession.

Causes of Economic contraction

Living costs squeezing disposable income. Rising fuel and energy prices have caused a decline in disposable income for many consumers. This has led to a fall in consumer spending

Interest rates stagnant. Faced with rising inflation (increased to 4.1% yesterday), the ECB have been reluctant to cut rates to boost growth (interest rates are 5.25%). Governments have also little room for manoeuvre with fiscal policy; most countries already have high levels of government debt and are close to breaking the fiscal and stability pact. This approach contrasts with the US, who have aggressively cut interest rates and implemented tax cuts to try and stave off recession.

Strong Euro. Although the Euro has recently weakened against the Dollar; it still remains highly overvalued on Purchasing power parity standards. The strength of the Euro and weakness of global demand is harming Euro exports, traditionally a strong aspect of the Euro economy.

Falling Housing Markets. After a decade of booming housing markets, many countries are now seeing their housing market go into reversal. In particular Spain and Ireland are likely to see painful reversals. Overvalued prices and excess supply is likely to contribute to falling prices and job losses in the construction industry. Although, France and Germany are less susceptible to housing volatility, they may still

The biggest decline in growth came in Germany (0.5%) and France (0.3%)


It is rather ironic that the Euro economy has beaten the US into recession. For a long time all the bad news seemed to stem from the US. The Euro recession seems to have creeped on us with less notice. Maybe the ECB are hoping a little pain now, will be worth it in the long run.

No comments: