Moody’s Credit Rating Agency has set the stage for the coming weeks, warning that crisis has escalated in recent weeks and has resulted in a negative scenario in which several countries of the European Monetary Union (EMU) could default and collapse out of the single currency union.
In two ominous reports released on Monday, the credit rating agency noted the risk of a series of EU Member State defaults is no longer negligible. Coupled with the warning form the Organization for Economic Co-operation and Development (OECD), contagion risk among the sovereign nations and the looming fear of a credit crunch has a very real possibility of derailing the fragile global recovery that has been depicted by the 7 week trough in global stocks. The OECD, a Paris-based thinktank, slashed its forecast for growth among its 34 members from 2.3% half a year ago to 1.6%, with Europe drastically downgraded from 2% to .2%. The escalation of fiscal hysteria comes as media assets have illustrated the collapse of the Euro as having the ability to send the world’s advanced economies into a severe recession, dragging emerging markets with them into the slippery slope. Consequently, with Italy’s debt nearing 1.9 trillion Euros and its 10-year bonds dropping to 7.18% from its previous high of 7.44%, the devastating critiques of the Eurozone are far from dramatizations and mark a clear realization that the 17 Eurozone countries are even wider apart on the measures required to staunch the exit of global investors and prevent an even worse scale of depressed economic forecast. Evidently, the trepidation and precipice of fiscal ruin is demonstrating by the desperation of debt auctions being held not only by Italy, Spain and Belgium, but also by two of the largest economies in the EU, France and Britain.
“The Euro Area is approaching a junction, leading either to a closer integration or great fragmentation. While limited by ineffective fiscal controls and a consensus-driven approach to crisis management, the Euro Area possesses tremendous collective economic and financial strength We believe that an effective resolution of the crisis, accompanied by closer economic and financial integration, would help preserve the current ratings.” – Alastair Wilson and Bart Oosterveld, Moody’s Investors Service
Furthermore, fears are only being fueled by reports of a prolonged, deepened recession in which recession unemployment would soar and marked declines in activity. According to an OECD report, the Eurozone is predicted to expand by a disturbingly low 0.2% in 2012, yet a worst-case scenario prediction has illustrated the Eurozone economy shrinking by 2.1% in 2012 and a further 3.7% in 2013. Most alarmingly are warning that the crisis has the potential to tip the global economy into another recession. The dangers of the crisis have been apparent in the volatility of the stock markets and the credit rating agency downgrades. Nevertheless, the demonstration and violent protests orchestrated throughout Greece, Spain, Italy and Britain are the most influential evidence of the decaying stability and anarchic situation culminated by a prolonged fiscal crisis. The UK has undergone public spending cuts, falling household consumption and weak exports, all of which have weakened the UK economy. Reports predict a shrink of 0.1% in the last 3 months of this year and then 0.6% in the first 3 months of 2012. This is complimented by a rise to 9.1% in unemployment by 2013, up from 8.3% today, leading to an increase in social problems and homelessness. With the UK on the brink of a double-dip recession, the contagion is clearly spreading from the weaker periphery of the Eurozone to the once-stable core.
“This call for rapid, credible and substantial increases in the capacity of the EFSF together with, or including, greater use of the ECB balance sheet. Such foreful policy action, complemented by appropriate governance reform to offset moral hazard could result in a significant boost to growth in the Euro Area and the global economy.” – Pier Carlo Padoan, OECD Chief Economist
Despite the trust and hope placed in the European Financial Stability Facility (EFSF) and the European Central Bank (ECB), the strength and efficiency of these entities depends on foreign interest in the agenda and progression models. On Tuesday, the finance ministers of the Eurozone are to attend a meeting of the Council of ministers, seeking to agree on details leveraging the EFSF bailout fund so it can help Italy and Spain, should they need aid. The guidelines for the EFSF illustrate the rules for EFSF intervention on the primary and secondary bond markets, for extending precautionary credit lines to governments, leveraging its firepower and investment and funding strategies. The objective of the ministers’ meeting is an attempt to boost the EFSF’s impact to 1 trillion Euros but those hopes are sinking due to spiralling bond yields, investor flight from Eurozone debt, and failure to entice investor governments in the far east to commit to the plan. The meeting is likely to also approve the next tranche of emergency loans for Greece and Ireland.
“Policy making in Europe seems to be moving in the direction of further integration, which is positive, bu uncertainty remains about getting there in time to save the Euro. A breakup of the Eurzone can be avoided, but bold measures are needed soon.” – Jose wynne, Analyst at Barclays Capital
In retrospect, the fiscal disunion of the supranational entity has illustrated the consequences of inadequate supervision and regulation; yet, the prolonged crisis due to delayed response has brought political integration and enlargement among the EU members. Despite the exclusivity of the Frankfurt Group and the sideline actions of France and Germany, the dedication for resolution and rigid regulation exhibits the reformation of the supranational entity into a regulate and efficient union. Moreover, the controversy of UK interference in fiscal matters and the ignored call for referendum illustrate the perseverance of the country to staying in the EU, as well as its resolve in its commitment to the EU. So saying, the sacrifices by the individual members has cost many members their credibility, Selectorate support, political stability and countless harrowing challenged. Nonetheless, it has also demonstrated the dedication of Member States to aspire beyond the complexity of intergovernmentalism and towards the even more complex and challenging elements of supranationalism.