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The Euro area: the slowdown is confirmed
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Important decisions taken at the summit of European Union heads of state.
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The school year normally begins in September. Most students will have new teachers or will even start new subjects. However, those repeating the year will be able to use the same text books and will probably have the same teachers as last year. The same thing is happening with the European Union (EU) as, although it's done its homework, its marks weren't good enough to pass its September retake and it will face the same problem of handling sovereign debt as some EU Member states.
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In fact, far-reaching decisions were taken at the summit of the heads of state or government of the euro area held in July. Firstly, the second bailout plan for Greece was agreed, totalling 109 billion euros. This plan will be implemented through the European Financial Stability Facility (EFSF) as the financial vehicle for the next payout. In the same summit statement, it's calculated that, in the case of Greece's bailout, the net total contribution from the private sector will be around 50 billion euros for the period 2011-2014. Part of this aid is due to the financial sector which, voluntarily, might support Greece in order to reinforce the overall sustainability of the new plan.
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Greece's second bailout plan is approved.
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Secondly, it was decided to extend the maturity schedule for future EFSF loans to Greece from the current period of 7.5 years to a minimum of 15 years and up to 30 years, with a 10-year grace period. On the other hand, the interest rate was lowered that is required by loans close to the EFSF funding cost, without going below it.
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Lastly, authorization was given for the EFSF and the European Stability Mechanism to intervene in buying up sovereign debt in secondary markets. The only requirement is a preliminary analysis by the European Central Bank acknowledging the existence of exceptional circumstances in the financial markets that warrant such intervention, although this last measure won't come into force until the 27 EU Member states approve it in their respective parliaments.
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Proposals continue regarding reforms of the institutional architecture.
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Since the start of this crisis, two lines of action can be observed on the part of those managing European economic policy. On the one hand, the urgent solutions that must be presented given the problems diagnosed, for example a financial bailout plan or regulations in financial markets to prevent short selling, etc. On the other hand, more extensive structural reforms of the architecture and governance of European institutions have also been considered and positions taken. Of note for this last context is the Franco-German summit of 16 August in terms of pushing the European project forward.
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The second quarter's GDP figures confirm the slowdown in the economy.
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In fact, at the summit held between Sarkozy and Merkel, ambitious proposals were noted to increase European economic coordination. Firstly, a budgetary golden rule so that all countries in the euro area include a public deficit limit in their constitutions. Moreover, France and Germany undertook to apply a common corporate tax to their companies as from 2013. Lastly, the creation of an economic government for the euro area was proposed, made up of government heads and run for two and a half years by a permanent president.
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These new proposals have arisen within a context of economic slowdown, confirmed by the figures for the euro area's gross domestic product (GDP) from the second quarter. GDP grew by 0.2% quarter-on-quarter, lower than the previous figure of 0.8% and reducing year-on-year growth from 2.5% to 1.7%. The breakdown for growth is still not available but, geographically, the flat growth of France (0.0%) and the lower than expected growth of Germany (0.1%) have negatively affected data on economic activity in the second quarter. We should remember that, together, Germany and France's GDP accounts for 48% of the euro area as a whole.
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Leading indicators suggest modest growth in the third quarter.
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To some extent, a slower rate of growth was expected, as the rate recorded in the first quarter was exceptionally high. However, the slowdown has been more intense than predicted by the consensus of economists' forecasts. These figures are cause for concern as growth is the best antidote for those countries with problems of fiscal consolidation. And leading economic indicators point to very modest growth for the third quarter.
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For example, the Purchasing Managers' Index continues its downward slide started in February this year. The index is similar to a business confidence indicator. Values over 50 imply expanding economic activity whereas values under 50 suggest shrinkage. This index suggests that business confidence is still in decline and the implications for job creation are not positive.
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Business and consumer confidence indices continue to decline.
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The main macroeconomic data, such as consumer confidence, point in the same direction. The figure for July fell slightly to -11.2, a level at which consumer confidence has remained stuck since August 2010. Economic sentiment surveys also continued to fall from the peak reached in February this year. Growth in the euro area's industrial production also continues to decrease.
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On the other hand, this European economic situation is occurring within a context of lower world growth, both in emerging countries and also in the rest of the EU's main trading partners.
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This situation is important because a large part of the dynamism in Europe's current economic cycle comes from exports, whose growth levels are likely to fall over the coming months.
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The context of global economic slowdown damages European exports.
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Given the consolidated growth data for the first half of this year, together with economic indicators that point to modest GDP growth in the third quarter, our 1.9% growth estimate for the whole of 2011 in the euro area has been revised downwards by two tenths of a percentage point to 1.7%. Although the slowdown during the central part of this year is temporary, tensions in the financial markets, with the rise in risk premia for sovereign debt and the acceleration of fiscal adjustment plans, for example in Italy and France, could keep growth at a very gentle pace over the coming quarters.
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Our growth forecast for the euro area is revised downwards from 1.9% to 1.7%.
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In summary, the slowdown in the euro area's economy has been confirmed and moderate growth is expected for the third quarter of this year. And all this within a context of world economic slowdown that is damaging European exports, while the sovereign debt crisis is a subject that still has to be passed at the start of this school year in September.
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