Europe holds the punch

The EU will suffer less from the US crisis than Russia, and less than the EU from Russia

The Russian economy is greatly overheated, but its stability in the face of the global financial crisis will be higher than in most European countries due to the export of energy resources. In general, the next two years are not expected to be the most pleasant in terms of economic growth for Europeans, but due to their better financial position, they will survive them much more easily than Americans. Such conclusions are contained in the report of the International Monetary Fund (IMF) “Europe. Reassessment of Risks”, which was presented in Moscow on April 22 by the head of the fund’s representative office in Russia, Neven Mates.

Over the past year, the IMF has repeatedly revised its position on the situation in the world economy. Last spring, the fund’s specialists were confident that the scale of the then-mortgage crisis would be insignificant and would not seriously affect the development of the real sector. However, most recently, in its review of the world economy, the IMF turned 180 degrees and predicted a new “Great Depression”, with a sharp drop in growth rates everywhere, but especially in developed countries.

In a new report, the fund shows that the epicenter of all the problems will still be in the United States, while Europe will take the brunt of the economic crisis. If the US GDP growth rate, according to the IMF forecast, should fall to 0.5-0.6 percent in 2008, then in the Old World the prospects do not look so gloomy. In the euro area this year, GDP growth will fall to 1.4 percent from the current 2.6 percent, and in the European Union as a whole – to 1.8 percent compared to 3.1 in 2007.

Globalization will play a key role here: the deterioration of the European economy will not happen due to internal problems, but “due to” the negative influence of the United States. According to estimates by IMF experts, a decrease in the growth rate in the USA by 1 percentage point means a decrease in the same indicator in Europe by 0.75.

With regard to intra-European difficulties, the collapse of the real estate market on the continent, apparently, is inevitable. Particularly serious trials threaten this because of Ireland, Spain and the UK, which have experienced a real boom in housing prices in recent years. But in general, Europe will endure a sharp drop in property prices. Largely because households on this side of the Atlantic are not so deeply stuck in debt, and mortgages to insolvent borrowers are not issued anywhere else in Europe, except in the UK.

It is worth noting that European financial and credit institutions have already suffered heavy losses from the crisis. So, the largest Swiss bank UBS in terms of asset write-offs only slightly lost its dubious superiority to the American Citigroup. Other financial “monsters” of the EU, for example, Societe Generale or Deutsche Bank, release joyless reports over and over again. However, they all suffered due to the mortgage crisis in the United States and not in Europe.

Another danger posed by the current alarming situation is the acceleration of price increases. Inflation on the continent is caused primarily by external factors, namely, the rapid rise in the cost of oil and food. In 2008, price records for wheat, rice, sunflower oil and other food products were updated. As noted by Neven Mates, answering a question from the Lenta.Ru correspondent, both food and energy are becoming more expensive due to the action of long-term fundamental factors than due to speculative operations. So, in the short term, they will continue to grow – at least another year before the desired stabilization sets in.

IMF economists forecast a strong surge in inflation in 2008. In the EU, the consumer price index will rise to 3.1 percent instead of the current 2.6, while the Eurozone will experience a growth rate of up to 2.8 percent (2.4 in 2007). Of all the EU countries, the Baltic states and Bulgaria will suffer the most. In Latvia, inflation in 2008 should rise to 15.3 percent, in Estonia – to 9.8. Poor European countries are most exposed to inflationary risks, since food in their consumer basket is a larger share, therefore, inflation is felt more strongly.

The geographical east of the European Union is generally a region extremely vulnerable to the global crisis. Financial systems in the New Europe countries are unstable, the economy is still underdeveloped. The situation is greatly complicated by the huge balance of payments deficits that have recently formed in these states. Thus, in Lithuania, the negative balance of the balance in 2007 was 13 percent, in Bulgaria – 21.4 percent, and in Latvia – 23.3 percent. These countries should count on the inflow of foreign capital in order to plug the emerging holes in the financial system, but it can just dry up due to the search by investors.

Russia, fund experts say, is more protected from the crisis than countries in Eastern Europe. Its “special position” is due to its status as an oil exporter. Therefore, the losses that the economy may suffer due to the crisis around the world are offset by the benefits of super-expensive energy sources. Although the country’s GDP growth will slow down somewhat, it will still far exceed the similar indicators of most European countries

Nevertheless, the IMF, as Neuven Mates puts it, sees “signals of overheating” in the Russian economy. This relates primarily to the reduction of the balance of payments surplus. In 2006, it amounted to 9.5 percent of GDP, and in 2007 it was already only 5.9. Strong inflation also fluctuates the country’s position as one of the most successfully developing. At its rate indicated in the fund’s forecast (11.4 percent), in 2008 Russia will lag behind only Ukraine and Latvia (21.9 and 15.3 percent, respectively). Meanwhile, by April 7, inflation in the Russian Federation since the beginning of the year has already exceeded 5.3 percent. So, in all likelihood, the IMF forecast is still too optimistic.

The fund also found positive dynamics in the development of Russia. According to Mates, the rapid growth of the country’s economy is primarily due to increased labor productivity and technical modernization of industry and services. All this together allows the Russian Federation, according to experts of the organization, to look confidently in the near future, despite the turmoil on a global scale.

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