Prize-winning economist Joseph Stiglitz declared central European economies at risk for returning to the brink of recession as the government policy to cut spending to reduce budget deficits.
“Forcing a reduction of investment [the government] that have stimulant effects high with the aim of making the deficit look better is something stupid,” he said in an interview with RTE Radio in Berlin was quoted by Bloomberg yesterday.
Euro area the government is working to cut the deficit to below the limit of 3% of gross domestic product (GDP) after the Greek crisis of investor confidence in the lower 16 states in the region.
Although in the second quarter of this region recorded the fastest growth rate in four years, the recovery faced with weakening economic indicators. In August, the service sector and manufacturing growth weakened from the EU among economists forecast in August.
Level of investor confidence in Germany also slowed to its lowest level in 16 months. “Many countries in Europe to focus on the deficit limit of 3%. They risk returning to the brink of a double-dip. Limitation of 3% was not real and only see one side of the balance sheet, “Stiglitz added.
Moody’s Investors Service yesterday warned downside risks to economic growth in the euro area has increased. In May, the EU Commission projected a budget deficit in the euro area this year will reach 6.6% of GDP, down from 6.3% in 2009.
Ireland has recorded the largest budget deficit that is at the level of 14.3% of GDP. Estimated deficit narrowed further to 11.7% this year, with the exception of the banking bailout package.
“Ireland is too small to determine the condition of Europe as a whole. But, if Germany, England and other major nations follow the approach of cutting a massive deficit, the Irish will suffer, “Stiglitz added.
Anton Gunawan, chief economist of PT Bank Danamon Indonesia (PT), Stiglitz’s opinion precisely assess too pessimistic. “The slowdown may be so, but if the recession in which a row of negative growth, I doubt it,” he told Business.
Anton believes the momentum of recovery will still take place in the EU assuming a level of confidence will improve, investment and trade will also increase. Moreover, German and French economies which became the main driver of growth in the region still has strong prospects.
With these considerations, he said, the stimulus in countries such as Germany and France it is no longer needed. Who should watch out is the effect of reducing the budget deficit in Greece, Spain and Portugal.
“It’s going to affect growth, but not until the recession. What is important now is to keep the debt of Greece do not have a default. Inevitably there must be no restructuring. Ratings must be down, but controllable. I see no way to get there. ”
The rate of quarterly GDP euro 16 user countries in the second quarter grew by the fastest pace in four years ie 1%. EU GDP, which consists of 27 countries, as a whole is also moving with the same magnitude.
German Statistical Office data yesterday showed the country of export performance Panzer increased 8.2% in the second quarter compared with the previous quarter, while investment in machinery and equipment rose by 4.4%.
In the second quarter, Germany’s economy grew 2.2% on a quarterly basis, or the fastest pace since reunification in 1991. However, the Head of Economic Research predicts Commerzbank AG Ralph Solveen Europe’s biggest economies will meet with obstacles in maintaining the growth momentum in the second semester.
Tone of pessimism also emerged from the British central bank officials of the Bank of England Martin Weale. He claimed the UK faces recession risk second phase. “Based on our latest projections, there are great opportunities economy contracted during the next four quarters,” he said as reported by The Times.
Among the 16 countries in the euro area, after Ireland, the second largest shareholder is the government deficit in Greece that is equal to 13.6% of GDP in 2009. Local government deficit-cutting target to the range of 3% in 2014.
Besides having access to external financial constraints, the Greek banking sector also is in the midst of political pressure to merge. National Bank of Greece SA, EFG Eurobank Ergasias SA, Alpha Bank SA and Piraeus Bank SA has been requested by the Minister of Finance George Papaconstantinou and Central Bank Governor George Provopoulos to the merger.
According to Pawel Uszko, an analyst with Macquarie Research in London, mergers can reduce competition also pushed the cost of deposits and savings, although will not be able to overcome the problem of liquidity, bad loans and bond issues.
HSBC Holdings Plc recorded a share of the Greek banking bad debts soared to reach levels of 8.2% of total loans outstanding in the quarter I/2010, up from 7.7% at the end of last year’s record.