Austerity may not be enough to save the EU's weakest links

Analysts at the credit ratings agency Moody’s Analytics have issued a stark warning that even with budget deficit programmes and savage cuts in public spending across the eurozone some of the weaker peripheral nations will still default on their debts, requiring a "restructuring".

They say: "It is hard to escape the conclusion that austerity will not end the debt crisis, and that restructuring may be necessary, as Germany's Chancellor Merkel has indicated."

Arguing that Europe is the "weakest link" in the global economy, they say that the fortunes of Asia and the West will diverge further next year, and that the United States' prospects have "improved only somewhat" with the passage of the recent budget deal in Congress.

But China also represents a threat to growth around the world. Reflecting recent caution from the Bank of England on the flow of funds into emerging markets, the Moody’s Analytics economists add: "Although China will continue rapid growth, it faces downside risks from inflation and a real-estate market correction. Despite these problems, our baseline outlook for recovery assumes Europe and China will go through orderly restructurings that will prevent further financial panic."

Overall, downside risks to the global outlook have increased since the start of 2010, say the analysts, adding: "Even if these risks do not materialise, growth in the world's largest economies is set to slow in 2011 before picking up in 2012."

That is the consensus view among international bodies such the IMF. But Moody's is much more gloomy about the chances of Europe being able to make it through the next few years without a major dislocation – even comparing the situation with the Argentine banking crisis of 2001, which saw riots as the value of people's savings was wiped out by 75 per cent in what was in effect a default as the country failed to maintain its link with the US dollar. Similar stresses in nations such as Greece are foreseen by the Moody's team.

In a gloomy note, Moody's states: "The largest risks to global recovery stem from Europe's sovereign debt crisis.

"The amount of austerity needed to correct Europe's imbalances may be as politically unsustainable as it was for Argentina in 2001. Even in Britain, which has not had a full-blown sovereign debt crisis, new fiscal austerity measures have sparked demonstrations by students facing higher university fees."

There is also a blunt criticism of the EU's leaders: "Both European bondholders and policymakers face problems in 2011 because officials clung too long to the belief that government austerity plus bailout financing was sufficient to handle debt overhang in periphery countries.

"The recent reconsideration of that position by German Chancellor Merkel and the ECB has come too late to avoid draconian cutbacks, higher unemployment, and declining output in the periphery countries."

Most worryingly, there is also the suggestion that the current austerity packages may not work economically even if they find political acceptance: "Europe remains the weak link, not just because of its sovereign debtcrisis but also because even its fiscally stronger states – France, Germany and the UK – are tightening fiscal policy. With growth still below potential, this could push the region's more vulnerable economies into recession. Europe might still be able to muddle through, but an orderly restructuring of sovereign debt is looking more desirable as the damage from budget cuts mounts and as high-debt countries struggle to escape recession."

Andres Carbacho-Burgos, an economist at Moody's and author of its global outlook, concludes: "Europe seems to have abandoned fiscal stimulus measures as a macroeconomic policy tool, while the US has yet to find a way to use a fiscal stimulus in a way that is debt-neutral over the long term.

"The world economy continues to diverge as 2011 begins, in ways that could produce serious side-effects."

PROMOTED VIDEO
Sport
Mario Balotelli pictured in the win over QPR
footballInternet reacts to miss shocker for Liverpool striker
Voices
Sol Campbell near his home in Chelsea
voices
News
Kimi the fox cub
newsBurberry under fire from animal rights group - and their star, Kimi
Arts and Entertainment
Ella Henderson's first studio album has gone straight to the top of the charts
music
News
<p>Jonathan Ross</p>
<p>Jonathan Ross (or Wossy, as he’s affectionately known) has been on television and radio for an extraordinarily long time, working on a seat in the pantheon of British presenters. Hosting Friday Night with Jonathan Ross for nine years, Ross has been in everything from the video game Fable to Phineas and Ferb. So it’s probably not so surprising that Ross studied at Southampton College of Art (since rebranded Southampton Solent), a university known nowadays for its media production courses.</p>
<p>However, after leaving Solent, Ross studied History at the School of Slavonic and East European Studies, now part of the UCL, a move that was somewhat out of keeping with the rest of his career. Ross was made a fellow of the school in 2006 in recognition of his services to broadcasting.</p>
TV

Rumours that the star wants to move on to pastures new

Life and Style
fashion
News
Paul Nuttall, left, is seen as one of Ukip's key weapons in selling the party to the North of England
i100
Arts and Entertainment
Russell Brand labelled 'left-wing commie scum' by Fox News
TV
Arts and Entertainment
BBC's Antiques Roadshow uncovers a TIE fighter pilot helmet from the 1977 Star Wars film, valuing it at £50,000
TV

TV presenter Fiona Bruce seemed a bit startled by the find during the filming of Antiques Roadshow

News
people

Comedian says he 'never laughed as hard as I have writing with Rik'

News
ebooksAn unforgettable anthology of contemporary reportage
Sport
Steven Caulker of QPR scores an own goal during the Barclays Premier League match between Queens Park Rangers and Liverpool
football
Arts and Entertainment
artKaren Wright tours the fair and wishes she had £11m to spare
News
i100
Life and Style
Kirsty Wark and Camila Batmanghelidjh been invited to take part in Women Fashion Power, a new exhibition that celebrates the way women's fashion has changed in relation to their growing power and equality over the past 150 years
fashionKirsty and Camila swap secrets about how to dress for success
Arts and Entertainment
Joy Division photographed around Waterloo Road, Stockport, near Strawberry Studios. The band are Bernard Sumner (guitar and keyboards), Stephen Morris (drums and percussion), Ian Curtis (vocals and occasional guitar), Peter Hook (bass guitar and backing vocals).
booksNew book on Ian Curtis sheds fresh light on the life of the late singer
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Operational Risk Manager - Asset Management

£60,000 - £80,000: Saxton Leigh: Our client is an leading Asset Manager based...

Project Coordinator - 12 month contract

£27000 - £32000 Per Annum: Clearwater People Solutions Ltd: Our large charity ...

IT Operations Manager - London - £55,000

£50000 - £55000 per annum + bonus + benefits: Ashdown Group: IT Relationship M...

Banking Solicitor NQ+

Highly Attractive Salary : Austen Lloyd: NOTTINGHAM - BRILLIANT FIRM - You wil...

Day In a Page

Oscar Pistorius sentencing: The athlete's wealth and notoriety have provoked a long overdue debate on South African prisons

'They poured water on, then electrified me...'

If Oscar Pistorius is sent to jail, his experience will not be that of other inmates
James Wharton: The former Guard now fighting discrimination against gay soldiers

The former Guard now fighting discrimination against gay soldiers

Life after the Army has brought new battles for the LGBT activist James Wharton
Ebola in the US: Panic over the virus threatens to infect President Obama's midterms

Panic over Ebola threatens to infect the midterms

Just one person has died, yet November's elections may be affected by what Republicans call 'Obama's Katrina', says Rupert Cornwell
Premier League coaches join the RSC to swap the tricks of their trades

Darling, you were fabulous! But offside...

Premier League coaches are joining the RSC to learn acting skills, and in turn they will teach its actors to play football. Nick Clark finds out why
How to dress with authority: Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear

How to dress with authority

Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear
New book on Joy Division's Ian Curtis sheds new light on the life of the late singer

New book on Ian Curtis sheds fresh light on the life of the late singer

'Joy Division were making art... Ian was for real' says author Jon Savage
Sean Harris: A rare interview with British acting's secret weapon

Sean Harris: A rare interview with British acting's secret weapon

The Bafta-winner talks Hollywood, being branded a psycho, and how Barbra Streisand is his true inspiration
Tim Minchin, interview: The musician, comedian and world's favourite ginger is on scorching form

Tim Minchin interview

For a no-holds-barred comedian who is scathing about woolly thinking and oppressive religiosity, he is surprisingly gentle in person
Boris Johnson's boozing won't win the puritan vote

Boris's boozing won't win the puritan vote

Many of us Brits still disapprove of conspicuous consumption – it's the way we were raised, says DJ Taylor
Ash frontman Tim Wheeler reveals how he came to terms with his father's dementia

Tim Wheeler: Alzheimer's, memories and my dad

Wheeler's dad suffered from Alzheimer's for three years. When he died, there was only one way the Ash frontman knew how to respond: with a heartfelt solo album
Hugh Bonneville & Peter James: 'Peter loves his classic cars; I've always pootled along fine with a Mini Metro. I think I lack his panache'

How We Met: Hugh Bonneville & Peter James

'Peter loves his classic cars; I've always pootled along fine with a Mini Metro. I think I lack his panache'
Bill Granger recipes: Our chef's heavenly crab dishes don't need hours of preparation

Bill Granger's heavenly crab recipes

Scared off by the strain of shelling a crab? Let a fishmonger do the hard work so you can focus on getting the flavours right
Radamel Falcao: How faith and love drive the Colombian to glory

Radamel Falcao: How faith and love drive the Colombian to glory

After a remarkable conversion from reckless defender to prolific striker, Monaco's ace says he wants to make his loan deal at Old Trafford permanent
Terry Venables: Premier League managers must not be allowed to dictate who plays and who does not play for England

Terry Venables column

Premier League managers must not be allowed to dictate who plays and who does not play for England
The Inside Word: Brendan Rodgers looks to the future while Roy Hodgson is ghost of seasons past

Michael Calvin's Inside Word

Brendan Rodgers looks to the future while Roy Hodgson is ghost of seasons past