EU economy vulnerable to outside crises

Brussels – The European Union’s economic performance during the second half of 2002 was «disappointing,» the European Commission said in its quarterly report released yesterday. Moreover, the Commission warns, the expected «takeoff» in economic growth envisaged for 2003 will not take place, at least in the first half of 2003, with the likely war in Iraq being just one of several causes. The report also reveals that France and Germany exceeded, as expected, the budget deficit limit – 3 percent of a country’s gross domestic product – prescribed by the EU’s Stability and Growth Pact. Whereas Germany has pleaded special circumstances and has promised not to repeat its performance, France is defiant, saying that it would go ahead with cutting taxes to stimulate the economy. The Commission notes that the «inertia» of the EU’s economy has four causes: the «geopolitical tension» over Iraq and a likely US-led war there; the «spectacular collapse» of stock markets across Europe; enterprises’ cost-cutting strategies, designed to limit losses or boost profitability; and, generally, the European economy’s «insufficient resistance» to outside turbulence. Of course, the Iraq crisis is having an immediate impact, with its influence on oil prices and the repercussions it has on business and consumer confidence. This, in turn, will negatively affect consumption, investment and employment. Neither unemployment nor wages have moved much recently, but uncertainty regarding employment is the main, but not the only, reason for the drop in households’ confidence and consumption. The report remarks that things are expected to get worse in the coming months. The Commission has tried to quantify the impact of oil prices on the economy by presenting alternative scenarios, from a 3-month spike in prices to $40 dollars per barrel to a two-quarter crisis, where prices will rise to $70 per barrel. In the worst case, the repercussions on the whole economy will be such that EU will certainly enter into a recession. The report also reveals that Greece is still the third most indebted EU country, with debt equal to 104.9 percent of GDP, but that the two others in a worse position are closing in fast. Belgium’s debt, once over 130 percent of GDP, is now at 105.4 percent, leaving Italy as the debt leader, at 106.7 percent of GDP.

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