Eurozone Crisis Still Threatens "Economic Paralysis"

The Eurozone crisis could yet reignite and cause "economic paralysis" if governments give in to anti-austerity protests and fail to bring public finances under control, the World Economic Forum said today, as it warned that the fragile global economy was distracting from critical long-term challenges.

The Global Risks 2013 report said that instability in the eurozone would "continue to shape global prospects in the coming years" and the risk of systemic financial failure, while limited, could not be discounted.

"Given the anti-austerity protests across the eurozone, the election of 'rejectionist' governments could lead to further economic paralysis and bring the eurozone crisis to a head, potentially destabilising the global financial system in which confidence is already waning," it said.

The report added that the weak economy was diverting attention from long-term issues "by limiting the availability of public resources and generating greater caution in use of scarce funds for strategic investment projects".

More than 1,000 experts from industry, government, academia and civil society, surveyed for the study, highlighted severe income disparities, chronic fiscal imbalances, rising greenhouse gas emissions, water supply crises and the mismanagement of ageing populations as the top risks facing the world in the coming decade.

The report's editor and WEF managing director Lee Howell said: "These global risks are essentially a health warning regarding our most critical systems. National resilience to global risks needs to be a priority so that critical systems continue to function despite a major disturbance."

The warning on the eurozone came after European Commission President José Manuel Barroso claimed that the existential threat to the single currency had been "overcome". Speaking at a conference in Portugal yesterday, he said that "in 2013, the question won't be if the euro will or will not implode".

But, revealing the continued weakness of the economy, data published today by Eurostat showed that unemployment in the region climbed to a new record high of 11.8 per cent in November 2012. It was up from the previous month's figure of 11.7 per cent. Youth unemployment rose to 24.4 per cent from 23.9 per cent.

Separately, Eurostat said that business sentiment in the eurozone edged up in December, a second consecutive monthly rise. Meanwhile eurozone retail sales rose by 0.1 per cent in November compared with October – though they were 2.6 per cent down on a year earlier.

Tim Ohlenburg, senior economist at the Centre for Economics and Business Research, said the eurozone was "trundling further into recession" and still faced a "long and hard trek" on the road to recovery.

Likewise Capital Economics' Jonathan Loynes described today's data as "fairly downbeat", adding: "While the lull in the debt crisis has continued, the eurozone's economic outlook remains very weak."

Still, asset management firm Schroders said today it was "optimistic that a severe crisis has been avoided" and an economic recovery could kick in later this year. "The path to recovery will be bumpy," said Jim Rehlaender in a report on the property market. "We expect the 'two steps forward, one step back' condition to predominate."