Europe’s Economy Worse Than Expected
New economic data released on Friday shows that Europe’s economy is actually doing far worse then many economists originally thought. Germany is now in the deepest recession of any major economy. Italy, Austria, Spain and the Netherlands are suffering the worst slump since World War ii.
During the first three months of this year, Germany’s economy shrank by 3.8 percent, the largest drop since Germany began keeping gdp data in 1970. Austria and the Netherlands shrank by 2.8 percent, Italy by 2.4 percent, Spain by 1.8 percent and France by 1.2 percent.
Across both the eurozone and the whole European Union, gdp fell by 2.5 percent in the first quarter. Comparing year-on-year data, the eurozone’s gdp fell by 4.6 percent, and the EU’s by 4.4 percent.
These numbers caught many economists by surprise. A Reuters poll of 45 economists predicted that Germany’s economy would contract by only 3 percent. Dominic Bryant of bnp Paribas said that the actual fall of 3.8 percent was a “truly terrible number.” Both the German government and economists are predicting that the economy will shrink around 6 to 7 percent in 2009—the biggest fall since World War ii. Year-on-year data shows that Germany’s economy shrank by 6.7 percent in the first quarter.
Italy, Germany, France and the Netherlands have experienced four consecutive quarters of economic decline. And these numbers are causing analysts to rethink their predictions on the economy. The recession in Europe began earlier and has become deeper than many originally expected.
“Taking in the new gdp growth figures released for the first quarter of 2009 … and considering the actual length of the current downturn in Europe, our forecast on Europe—despite the pessimism—might actually have been overly optimistic,” think-tank Stratfor wrote May 18. “And that is saying a lot.”
“We are in the heart of an economic and financial crisis, and we are headed towards a social crisis,” warned Luxembourg’s Prime Minister and Eurogroup President Jean-Claude Juncker on May 4. “My feeling is that many politicians underestimate the extent of the phenomenon,” he said.
Even before data from the last quarter was announced, Juncker predicted that the economic crisis would lead to a social crisis. The new data makes that prediction look even more likely.
Earlier this month, the European Commission warned that unemployment could reach the postwar high of 11.5 percent in the eurozone over the coming year. Spain has Europe’s highest unemployment rate. In the past year, it has more than doubled, reaching 17.4 percent.
The EU has committed around 5 percent of its gdp to ending the economic crisis through recovery plans and “automatic stabilizers,” like unemployment benefits.
It may be running out of money though. EU Economic and Monetary Affairs Commissioner Joaquin Almunia warned on May 14 that escalating national debt will force governments to cut their spending, including their spending on social benefits.
“The crisis may leave us with a potentially subdued growth potential, high unemployment and public finances under severe strain,” he said.
These spending cuts will be very unpopular. High unemployment and cuts in social spending are a volatile combination. With lots of people taking money from the government, many could get angry when the government decides it cannot afford all the benefits.
A total of 350,000 people marched in the streets of Berlin, Brussels, Madrid, Prague and other cities over the weekend as part of a series of demonstrations calling for greater job protection. If the governments of Europe cut spending, far more people will come out and protest. For more on Europe’s future, read our article “Did the Holy Roman Empire Plan the Greek Crisis?”