Europe's recession worsens

The French and German economies have sent Europe into a tailspin. Sean O'Grady reports

Saturday 14 February 2009 01:00


So far, the UK is still on course to be the worst performing of the major advanced economies in 2009, with a drop in GDP of about 3 per cent – the worst since the Second World War. At its nadir, the economy could fall by 4 per cent or more on an annualised basis, according to the Bank of England. The shocking 1.5 per cent contraction in the UK economy in the last quarter of 2008 was actually, we now know, milder than the German slump. Still, the weight of Britain's highly indebted households and public sector will hold back growth, living standards and employment for years to come.


Germany's traditional strengths in manufacturing, engineering and ex-porting have turned against her. Germany earns 30 per cent of her income from exports, and world trade shrank by 10 per cent in the latter part of 2008. Hence the worst slump in German exports for 40 years. As Europe's largest economy, a prosperous Continent is unthinkable without a vibrant Germany. Yesterday's announcement that her GDP shrank by 2.1 per cent in the last three months of 2008 was an unwelcome surprise, and confirmed that the world is entering a synchronised downturn, with little discernible difference between the profligate British and the hard-saving Germans.

Germany's recent jobs boom was in fact more than symbolically driven by the British buying German cars in record numbers and similarly buoyant machine tool orders from China. The possibility that Germany may fare even worse than the UK at least offers the British a little schadenfreude. The German government says the economy will shrink by 2.25 per cent in 2009.


French GDP fell 1.2 per cent quarter on quarter at the end of last year, shrinking at its fastest pace in 34 years. Economists had predicted a drop of 1.1 per cent, so it wasn't as dramatic as the German decline. The finance minister Christine Lagarde says she expected GDP to fall by at least 1 per cent in 2009; bad, but not so bad.

On the downside, we find similar factors to Germany: collapsing exports and investment, plus a crisis in the important French car industry. On the plus side,consumers are less nervous about spending than their counterparts elsewhere in the EU. Rising unemployment is concentrated among ethnic minorities. Doubts surround President Nicolas Sarkozy's ability to fight the immediate slump and implement longer-term structural change; more than 1 million people took to the streets last month to protest.


The Celtic Tiger is licking its wounds. The first eurozone nation to enter recession, in the first half of 2008, its decline is also set to be long and deep. The consensus is that the Irish economy will contract by 2.9, 4 and 0.8 cent over the 2008-10 period, with the public finances running badly out of control and the financial system in some disarray. As in the UK, a hefty increase in unemployment and the bursting of the housing bubble have pushed Ireland towards a slump and possible deflation – inflation registered a negative reading of 0.1 per cent in January. Heavily dependent on foreign direct investment, much of that is now proving outwardly mobile. Ireland's banks have had to follow the example of other nations and appeal to the state for help; the Irish government has announced an injection of €7bn into Allied Irish Bank and Bank of Ireland. They may need more. Most galling of all, there is talk of the nation becoming a net exporter of its people once again.


A contraction of 1 per cent in GDP in the fourth quarter of 2008 combines with an inflation rate of just 0.8 per cent to place Spain on the deflation "at risk" register. The collapse in her construction boom and the anguish in the real estate market have left Spain in recession for the first time in 15 years. The unemployment rate, at 13 per cent, is one of the worst on the Cont-inent. With Ireland, Spain is at the most risk of a downgrade of its sovereign debt, according to the Moody's credit-rating agency.


Almost the mirror image of Germany, with the economy still growing at an annual equivalent of about 2 per cent, but with messy public finances and market sentiment showing marked scepticism about the government's capacity to restore them to order. Credit agency downgrades have reinforced traders' views that Greece is the nation most likely to fall out of the eurozone.


The recession won't feel as bad in Italy as it will in much of the rest of the world because the eurozone's third-largest economy has scarcely grown over the last few years; it posted an expansion of 1.5 per cent in 2007, the weakest in the G7. A further bout of stagnation and underperformance now seems inevitable. The economy contracted by 1.8 per cent in the fourth quarter, its worst showing in almost three decades. Shaky public finances, unreformed markets and an ageing population are Italy's biggest woes.

The Netherlands

Down, but not as badly as the rest of the eurozone, and especially her neighbour Belgium. A contraction of 0.9 per cent means that the Dutch economy has been in recession since April last year, and will shrink by about 0.5 per cent this year, and unemployment stands at a very respectable 3.9 per cent. A competitive economy, current account surplus and plenty of natural gas have all helped.


Belgium's uncomfortable combination of above-average inflation and below-average growth are its economy's defining feature. The economy slipped backwards at the end of 2008, by 1.3 per cent. Public sector debt is scheduled to rise to close to 100 per cent of GDP – two and half times the UK's current level. The failure of Fortis hit the country hard, but one of the small mysteries of the EU is why Belgium's economic performance is so inferior to that of its neighbour Holland, with whom it has been in close economic partnership since 1948.


Despite an economy highly dependent on the world's stressed financial system and well-published troubles at UBS, the Swiss franc is enjoying a revival in its traditional role as a safe haven in times of crisis. The Swiss authorities seem to have coped better than most with their broken banks, taking a near-10 per cent stake in UBS and forcing it and Credit Suisse to increase their capital base. Nonetheless, even the wealthy Swiss will be worse off next year; GDP will fall by around 1.8 per cent in 2009.


Even Zimbabwe will see stronger growth than Iceland in 2009. A Great Depression-style fall in output of 10 per cent is forecast for next year, and the nation relies on the IMF and loans from her fellow Nordic countries. Misery awaits a people grown used to being some of the richest in Europe.

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