Eurozone crisis drives concerns about global economy
by Daniel Mason
The eurozone crisis continues to act as a drag on growth in emerging economies as well as leaving countries in central and eastern Europe open to the harmful impact of further shocks, according to Moody's rating agency.
Meanwhile European Central Bank president Mario Draghi has said that the euro's institutional weaknesses should be solved through gradual progress towards full economic and monetary union – and that there is no need for an all or nothing move towards a United States of Europe.
Today Chinese premier Wen Jiabao, speaking at the start of a two-day visit to Beijing by German Chancellor Angela Merkel, warned that the eurozone crisis had "continued to worsen" and was causing "serious concerns in the international community". And those concerns were echoed by Moody's, which said that the eurozone crisis continued to be the greatest risk to the global economic outlook.
In a new report, the rating agency said growth in emerging market economies such as China, India and Brazil would be slower than previously expected because the downside risks to the recovery had increased. It predicted growth in these countries of 5.2 per cent this year, down from an earlier estimate of 5.8 per cent.
"We are revising downwards our forecast for these large emerging market economies, where the weaker external environment and decelerating domestic demand are causing a slowdown in growth momentum," said Elena Duggar of Moody's. "We continue to expect that the slowdown in advanced economies and volatile capital flows will suppress growth in emerging markets."
Moody's also said there would be only a "modest recovery" in the Group of 20 advanced economies. It predicted robust growth in the United States but mild recession in the eurozone, with the G20 as a whole expanding by 2.8 per cent this year and 3.4 per cent in 2013. Duggar said: "In our view, fiscal consolidation efforts, weak consumer and business confidence, banking and household sector deleveraging, persistently high unemployment levels, and real-estate market weakness will continue to constrain growth in advanced economies."
In a separate report Moody's said that countries in central and eastern Europe could also be hit by the impact of the eurozone crisis. European Union member states in eastern Europe that are not part of the single currency have "high average sensitivity and would be significantly affected by further euro area development", it warned.
The report added that EU accession countries in the region would be affected by a worsening of the crisis, though "to varying degrees", while the EU's eastern neighbourhood would be the least exposed of the three groups. "They would nevertheless be affected by euro area shocks, despite the absence of the comprehensive integration frameworks that are available to EU and accession countries," according to the rating agency.
With the global impact of the eurozone crisis being highlighted by world leaders and rating agencies, ECB chief Draghi said yesterday that the solution was a "gradual and structured effort to complete economic and monetary union". In an article first published in the German newspaper Die Zeit, Draghi rejected the idea that eurozone had to either break up or move to a United States of Europe.
"To have a stable euro we do not need to choose between extremes," he wrote, adding that by "calmly asking ourselves which are the minimum requirements to complete economic and monetary union" policy-makers would "find that all the necessary measures are firmly within our reach".
At a meeting of the ECB's governing board on September 6, Draghi is expected to flesh out plans for intervening in bond markets in an effort to stabilise the borrowing costs of struggling eurozone countries such as Spain and Italy. The proposal has met with opposition in Germany, including from central bank chief Jens Weidmann, but the ECB president said that ensuring price stability sometimes meant taking "exceptional measures".
The urgency of solving the crisis was emphasised again by new data published by the European Commission showing that economic sentiment in the eurozone has fallen to its lowest level since August 2009. The indicator fell to 86.1 this month, down from 87.9 in July. According to the commission the loss of confidence was especially strong among consumers, in retail trade, and among construction managers.
In a speech in Austria today, commission President JosÚ Manuel Barroso also pushed for closer union. "There is a cumulative logic to the integration process: monetary union cannot function without a financial and banking union, and without further fiscal and economic union," he said, adding that political integration was also needed "to reassure the citizens of Europe that this is not just a project by the political and economic elites".