What's new in the EU

EU recovery slower than that of other advanced economies.

By ARI SYRQUIN
Europe continues to show signs of a tentative recovery with marginally positive growth and other economic indicators stabilizing, according to the European Restructuring Monitor quarterly.
There are however persistent concerns over levels of public debt and, to a lesser extent, over the stability of the euro.
The global economy is showing signs of a more robust recovery with the International Monetary Fund revising growth predictions for this and next year upwards by about half a percentage point. However, it also predicts that Europe will under perform relative to the other advanced economies and that downside risks have risen sharply amid renewed financial turbulence‚ related to concerns over sovereign debt. The weakening euro offers growth possibilities for export-oriented goods producers and may underpin private sector growth in the short term.
Such growth will assume greater importance in a context of widespread cuts in public spending.
Restructuring activity as captured by the ERM continues its recent trend of decline, albeit one where job losses continue to predominate over job gains.
Over the last quarter from April 1st to June 30th, the ERM reported 214 cases of restructuring. Of these, 141 were cases of restructuring involving job loss.
Total announced job losses totaled approximately 50,000 in the quarter as against announced job creation of just under 25,000 new jobs before.
Based on standard economic indicators, the European economy continues to show signs of stabilization and a gradual return to more normal patterns of growth after the extreme turbulence of 2008 and 2009. The consequences of the economic crisis are however likely to include further episodes of smallscale crisis similar to that surrounding the sovereign debt crisis in Greece in early 2010. High levels of public debt and unbalanced budgets are problems common to many EU member states, including those unkindly labeled PIGS (Portugal, Italy, Greece and Spain), and can lead to increased volatility.
To what extent the recovery has been conditioned by the exceptional stimulus packages - and loose monetary policy - in the immediate post-crisis period is a question that is about to be tested. A number of member states - with or without the prompting of the bond markets and sovereign debt concerns - have decided that now is the moment to reduce the levels of public support and steer government finances towards balance and sustainability. Austerity packages have not been restricted to member states with high or sharply increased levels of sovereign debt or budget deficit. While the public sector to date has served as a stabilizing source of employment and consumption, it appears inevitable that shrinking budgets will translate into public sector restructuring and retrenchment in the coming years.
There remains a polarization of views on the timing of withdrawal of public support especially to those economies - including much of the EU - only slowly emerging from recession. In part, this is related to differing perceptions over whether the principal monetary risk is inflation or deflation.
Nobel laureate economists Paul Krugman and Joseph Stiglitz have separately warned that premature withdrawal of stimulus in the US and other developed economies is self defeating and may undo the prospects of growth on which sustainable recovery must be based.
Unemployment in the EU has stabilized at 9.6 percent in May 2010 but is nearly three percentage points higher than at its most recent pre-crisis in early 2008. There were over nine million people fewer in work in the EU in the first quarter of 2010 compared to the recent peak in employment in the third quarter of 2008 (approximately 210 million compared to 219.5 million). The majority of job destruction has been concentrated in manufacturing and construction with consequent disproportionate impacts on younger, male, and unskilled/semi-skilled workers in the private sector.
ari@gscb-law.co.il The author is the head of the International Department at GSCB Law Firm.