A protester wearing a Guy Fawkes mask waves a flag outside the Portuguese Parliament in Lisbon. during a demonstration against the government's austerity measures.
A protracted recession may be in store for the country’s economy, several economist polled by the Mail & Guardian said, following suggestions there will be a major shift in economic policy in the EU — South Africa’s second-biggest trading partner.
“Weakness in Europe has already affected us and it would get worse if any deepening of the recession, the region is currently experiencing, occurs,” Stanlib chief economist Kevin Lings told the M&G.
Following the election victory of Socialist Francois Hollande in France and continued political jockeying over the formation of a new government in Greece, markets have reacted negatively to tacit proposals of a change in the economic strategies the EU has employed since the 2008 global financial crisis.
The proposition of the region turning its back on austerity has led to the European Council, the body charged with forging a political direction for the EU, to call a special summit on May 25 in the hopes of finding solutions to the looming problems the economic bloc faces.
The scene is set for a battle between Hollande and German Chancellor Angela Merkel over the recently signed European Fiscal Compact.
The compact, which comes into effect on January 1 2013, requires signatories to introduce a national requirement to have national budgets that are in balance or in surplus.
Merkel, the main proponent of austerity, has reiterated her stance that reining in public spending is the only solution to the EU’s current economic woes.
Hollande’s election victory hinged on the exact opposite, with a proposal of increased government spending to encourage economic growth, suggesting the compact could be dead in the water if he can gain enough support to overturn it.
Debt-laden Greece is also currently scrambling to form a government as rival political parties argue over the painstakingly negotiated €130-billion bailout package the country secured from the EU.
The left-wing Syriza party has labelled the austerity-based package as “barbarous” and vowed to renegotiate the deal.
Germany responded tersely to these suggestions, hinting that Greece may be forced to leave the Eurozone if it embarked on this route.
Adding a further blow to austerity measures, Ireland is holding a referendum on May 31 to gauge public support for the compact.
While increased spending could provide a temporary relief for economic problems currently experienced in the EU, Lings said it may not be beneficial in the long term.
“It’s a gamble. It may seem like a good idea to increase spending but it would be difficult to turn things around. Wild spending won’t fix anything: only when it is coupled with sensible reforms will you see benefits overall for Europe,” Lings said.
Adenaan Hardien, economist at Cadiz asset management, agreed.
“Over the medium to longer term, I wouldn’t see how trying to stimulate growth through increased spending would help. There would be an immediate relief but it doesn’t deal with the fundamental problems Europe faces,” Hardien told the M&G.
So faced with the uncertainty of Europe’s next economic move, South Africa can only wait with bated breath.
If the proposed plan to increase spending is adopted and fails, it would spell disaster for the South African economy.
Exports to the region would go into free fall and trade with other countries, including China, would be severely hindered.
China may currently be South Africa’s biggest trading partner, but the Asian economic giant’s buying power relies heavily on its own exports to the EU.
“South Africa stands to lose more in the long run if Europe were to pull back from the current course of austerity. China may have become our single biggest trading partner by country but Europe is still our biggest regional trading bloc and it would hurt us significantly,” Hardien said.
Chief economist at the Efficient Group, Dawie Roodt said the best case scenario for South Africa would be for Europe to “keep the ship together” by weathering low growth rates and ensuring the survival of the Euro.
“There is no way of not being affected. The reality is how bad it’s going to be. Is this going to be simply a bad dream or a horrible nightmare?” Roodt posed.