Euro symbol near European flags 311.
(photo credit: REUTERS/Francois Lenoir)
The euro zone debt crisis was in the headlines at the start of 2011, and remains firmly in the spotlight as the year draws to a close. European leaders have been unable to reach a consensus on how to solve the crisis, which is gradually having a greater impact on neighboring economies such as Israel’s.
RELATED:Israeli economy expanded estimated 4.8% in 2011
In November, the Organization for Economic Cooperation and Development downgraded the 2012 economic growth forecast of the 34-nation bloc to 1.6 percent from its May forecast of 2.3%. It cut Israel’s 2012 growth forecast to 2.9%, which – despite placing seventh among all OECD members – is a far cry from the prediction of 4.7% published just six months earlier.
Fears of a European sovereign debt crisis actually began to develop in late 2009, as concern grew over the high debt-to-GDP ratio of what was to become known as the PIGS group of countries – Portugal, Ireland, Greece and Spain. The next year the European Union approved the establishment of a special purpose vehicle aimed at preserving financial stability in Europe, and bailouts worth a combined 195 billion euros were approved for Greece and Ireland.
In 2011 the debt contagion spread to Italy, and speculation mounted about the collapse of the euro zone. The closest that European leaders came to agreeing on a remedy was on December 9, when only a British veto stood in the way of unanimous agreement on an inter-governmental treaty enshrining new budgetary rules to tackle the crisis.
Since then, at least five more non-euro zone countries (Poland, Hungary,
Czech Republic, Denmark and Sweden), have expressed reservations about
signing the treaty without parliamentary approval. Seventeen of the EU’s
27 member states use the euro as their currency.
Rating agency Fitch said last week that a comprehensive solution to the
euro zone debt crisis is beyond reach, and warned that six European
economies – including Italy and Spain – could be hit with credit
downgrades soon. The euro will end the year at or close to 12-month lows
over doubts leaders will achieve a consensus.
By all indicators the Israeli economy is in strong shape compared to the
economies of Europe and the United States, with its relatively high
growth rate (3.4% in the third quarter), and its lowest unemployment rate
in more than 30 years (5% in October). On the other hand, exports are
already suffering and the Treasury says it will suffer a shortfall of at
least NIS 2.6 billion on expected tax revenue this year.
The year 2012 is expected to be more difficult on the economy than 2011,
with growth almost certain to slow, and the unemployment rate expected
to rise to 6.4%, according to the Bank of Israel.
Prime Minister Binyamin Netanyahu, Finance Minister Yuval Steinitz and
Bank of Israel Governor Stanley Fischer have repeatedly urged
responsible budgetary policy in the face of the incoming storm from
Europe, saying Israel cannot afford to give in to “populist” demands to
expand the budget deficit.
These statements might have been more widely accepted, if not for the
fact they come amid growing public pressure to allocate more money to
social and welfare needs, and demands from the Defense Ministry – which
says it needs extra funds to deal with the threats posed by geopolitical
turmoil in the Arab world.
No matter the outcome of the euro zone crisis, it will remain in the
headlines in 2012, and it will have a big impact on the health of the