Warnings of economic gloom over export slump
12 April 2005, BRUSSELS - A top European Union official said Spain, France and Italy faced a "catastrophic" slump in exports as a fresh batch of gloomy data hit the eurozone.
12 April 2005
BRUSSELS - A top European Union official said Spain, France and Italy faced a "catastrophic" slump in exports as a fresh batch of gloomy data hit the eurozone.
The Spanish economy is in the final stages of a credit boom caused by inappropriately low interest rates, the British 'Daily Telegraph' reported.
Spanish property prices rose 17 percent last year, while the trade deficit ballooned to EUR 60.7 billion, or 7.7 percent of GDP.
French industrial output slumped 0.5 percent in February, following a 2.2 percent contraction announced last week by Germany.
The slide was blamed on high oil prices and the continued strength of the euro against the dollar and key Asian currencies.
The French prime minister, Jean-Pierre Raffarin, admitted yesterday that he now had no hope of fulfilling his pledge to cut unemployment below 10 percent over the coming months. The yield on 10-year French bonds fell to near historical lows of 3.58 percent.
The aborted recovery is causing growing alarm at the European Commission and the European Central Bank. Both bodies have slashed their eurozone growth forecasts from over 2 percent to 1.6 percent in 2005.
A senior EU official said the eurozone was now acutely vulnerable to any slowdown in the United States, having failed to generate enough internal demand to sustain recovery.
"I'm afraid there is a high probability that Italy, France and Spain could see a catastrophic drop in exports," he told the 'Telegraph'.
The official said the eurozone's problems were spreading from Germany to other countries with fast-rising labour costs, even if German consumers remained traumatised for the time being by unemployment of 5.2m, the highest level since the Great Depression.
Italy has lost 20 percent in competitiveness against Germany over the past eight years, but is now locked in a currency union with no monetary, exchange or fiscal levers left to pull.
Its budget deficit, already bursting through the Stability Pact's 3 percent limit, is forecast to reach 4.6 percent in 2006.
Stephen Jen, an economist at Morgan Stanley, said there was a growing risk that the effort to re-balance the global economy to wean it from dependence on US growth may now be done through an ominous "balancing down" rather than "balancing up".
There are signs of slowing in Japan, Korea, Malaysia, India, Taiwan and Thailand, though China still remains strong. The concern is that US consumers will retreat before the rest of the world begins to pick up the slack.
The European Central Bank can do little to boost demand since interest rates of 2 percent are already at 40-year lows and barely above the rate of inflation, now 1.9 percent.
Schooled in the rigorous tradition of the Bundesbank, ECB officials are worried that excess liquidity in the system could stoke future inflation - or worse, 1970s-style 'stagflation' with price pressures and low growth going hand in hand.
Subject: Spanish news