Europe is a downer for world recovery
The financial crisis in the United States tipped the world into a global recession, but the biggest obstacle to a full-scale recovery may now lie on the other side of the Atlantic -- in Europe.
On Friday, Britain reported that its economy suffered its steepest quarterly decline in 30 years and that car production fell 55% in April from a year earlier. On Thursday, Standard & Poor’s took the extraordinary step of lowering Britain’s credit outlook to negative, raising the specter of a cut in that nation’s golden rating on government bonds. And some European nations, including Germany and Italy, are now in the midst of their sharpest downturns on record.
Nine months into the worst economic downturn since the Great Depression, the free-fall in the United States appears to be giving way to a more measured decline, but economists are struggling to find a steady pulse in European and other industrialized nations, such as Japan, where the world’s second-largest economy is also slowing the global recovery. These countries’ recessions are shaping up to be both deeper and longer than the one in the United States, where the pace of job losses has eased and there are fresh signs of life in financial markets.
There are hints of stabilization in the Old World -- in Germany, for instance, investor sentiment is up amid indications that factory orders are stabilizing after months of sharp drops. But many economists now say Europe will trail the United States in pulling out of recession by at least three months.
Critics charge that this is partly because Europe is still moving slowly to roll out government stimulus programs and right its own ailing financial system. Some countries, like Ireland, are so cash-strapped that they’ve raised taxes in the middle of a deep recession, making things worse. In addition, European leaders have only recently signaled their willingness to conduct broad, systematic stress tests on their financial institutions, similar to the ones on major U.S. banks already concluded by the Treasury Department.
Indications are that they need such tests, and fast. While U.S. banks have already written down about half the estimated $1.1 trillion in troubled loans and toxic assets on their books, Europe’s financial institutions have thus far written down less than 25% of their $1.4 trillion in bad debts related to the crisis, according to a report from the International Monetary Fund. Many major Western European banks are also heavily invested in hard-hit Eastern Europe, where the risk of a fresh wave of corporate and consumer defaults is considerable.
“Recovery here depends on recovery abroad,” U.S. Treasury Secretary Timothy F. Geithner told a House Appropriations subcommittee last week. “Our financial reform effort in the United States must be matched by similarly strong efforts elsewhere in order to succeed.” In the face of congressional criticism of Europe, however, he defended the actions taken by its governments thus far, saying they were “better than you think.”
Nevertheless, Europe’s troubles are bad news for a global recovery. The 27-nation European Union accounts for almost a quarter of the world’s economic activity, and its sluggish emergence from the crisis is likely to slow any rebound in world trade and foreign investment.
“The net effect is that Europe will not be an engine in a global recovery; in fact, it will be quite the opposite,” said Eswar Prasad, senior fellow at the Brookings Institution and professor of trade policy at Cornell University. “Europe is going to be a drag on the world economy for the next one to two years.”
