Wednesday

1st Feb 2023

Southern euro-countries worst hit by recession

  • Olli Rehn says the eurozone recession is 'mild' (Photo: European Commission)

The EU economy is expected to grind to a halt in the 27 member states and to contract by an average of 0.3 percent of the eurozone's gross domestic product (GDP), with recession hitting Greece, Portugal, Italy and Spain worst, fresh EU forecasts for this year show.

"Compared to November, the prospects have worsened. Risks to growth outlook remain, but there are signs of stabilisation," EU economics commissioner Olli Rehn said Thursday (23 February) when presenting the forecast of what he called a "mild recession."

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The revision in just three months' time from growth of 0.8 percent of GDP in the eurozone to recession of 0.3 percent of GDP was mainly due to a drop in global trade, weak consumption and "fragile" financial markets. Inflation is also up compared to the autumn forecasts - due to a hike in oil prices and an increase in "indirect taxes".

The worst-hit countries are Greece, with a recession of 4.4 percent of GDP in 2012, but also Portugal (3.3%), Italy (1.3%) and Spain (1%) - signalling that the austerity reforms used to stem the euro-crisis are making a big dent in the economy.

Rehn and his spokesman defended the need for these reforms so that "sustainable growth" returns to these countries, rather than "bubble-based" growth relying on spending sprees and real estate price hikes.

Portugal - the third euro-country to have asked for a bail-out after Greece and Ireland - had "difficulties" long before the 2009 economic crisis, mainly due to competitiveness lost to emerging economies in Asia, Rehn said "There's no denial this is a difficult and painful process of economic adjustment for Portugal after two decades lost," he said.

One piece of good news, according to the commissioner, was that the cash injected by the European Central Bank via cheap loans averted a credit crunch and markets have had a "muted reaction" to the downgrade of several eurozone countries - except for Greece.

To some economists, the data only confirms a mistaken focus on budget cuts instead of investment and growth-spurring measures.

“The EU’s latest dismal growth forecasts provide further evidence for the inherent conflict between trying to restore competitiveness within the Euro area through fiscal consolidation and reducing real wages and tackling excessive indebtedness all at the same time,” said Sony Kapoor from Re-Define, a think tank.

He warned that the "social peace" in Portugal and to a lesser extent in Italy and Spain are "not immune" from what is happening in Greece - a reference to the violent protests and massive strikes the country has witnessed.

“As demonstrated by the experiences of Greece, Portugal and Spain, this course leads to biting, deep recessions and worsens public indebtedness. A focus on growth, not austerity, is the correct answer for Europe's ills.”

Need for firewall

Rehn said economic growth may return in the second half of 2012, provided the eurozone firewall is reinforced, a "sustainable solution for Greece" is put in place, banks are recapitalised and more focus is turned to growth and jobs.

Germany, however, is still opposing an increase in the joint ceiling of €500bn for eurozone's two bail-out funds - the temporary European Financial Stability Facility (EFSF) and the permanent European Stability Mechanism (ESM).

"The position of the federal government has not changed. There is no need (to boost the firewall)", German government spokesman Steffen Seibert said Wednesday in Berlin.

Berlin's resistance comes despite pressure from the IMF and other euro-countries to boost the combined firepower by allowing the remaining €250bn in the EFSF to be added to the €500bn-strong ESM. It is hoped such a move would calm markets and stop speculation about Spain and Italy.

Meanwhile, Greece's own second bail-out is still in question, as the IMF has indicated it will contribute only after a decision to boost the firewall is taken. EU leaders are supposed to focus on this issue next week during a two-day summit in Brussels.

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