Europe’s leaders urged to opt for growth

Europe’s leaders met on Wednesday for crisis talks to rescue the euro amid a warning from the West’s leading economic think-tank that persisting with strict austerity programmes risks a vicious circle that could derail the tentative recovery in the global economy.

Shares rallied on hopes that the summit in Brussels would find a solution to the debt crisis by backing proposals from new French president François Hollande that will boost growth andcreate jobs.

But tensions remained between Paris and Berlin, where Angela Merkel’s government maintained its strong opposition to the creation of common eurobonds, which would cut the borrowing costs of the heavily indebted countries facing intense financial market pressure.

In its half-yearly update on the global economy, the Organisation for Economic Co-operation and Development said the 17-nation single-currency area was on course to contract by 0.1% this year, with deep contraction in the countries of southern Europe. But, it said, a worsening of the debt crisis could result in output falling by as much as 2%. The organisation, which has 34 rich members, said it expected Greece to contract by 5.3%, Portugal by 3.2%, Spain by 1.6% and Italy by 0.9%.

Pencilling in a return to modest 0.9% growth in 2013, the organisation’s chief economist, Pier Carlo Padoan, said: “The risk is increasing of a vicious circle involving high and rising sovereign indebtedness, weak banking systems, excessive fiscal consolidation and lower growth.” He urged Europe’s leaders to adopt a “growth compact”, which would help countries to tackle their budget deficits through faster expansion.

Because developing countries such as China were still growing strongly, the think-tank said global growth this year would be 3.4%, down from 3.6% in 2011, before rising to 4.2% in 2013. But growth among the organisation’s members would be held back by Europe and would ease from 1.8% to 1.6% in 2012 before recovering to 2.2% in 2013. Of the big rich nations, the United States and Japan would grow most strongly, whereas Britain was expected to grow by just 0.5% this year, accelerating to 1.9% in 2013.

“We see a slow rebound of growth in the United States driven mostly by private demand, some pick-up in Japan and moderate to strong growth in emerging economies,” Padoan said. “We also see flat growth in the euro area, which hides important differences, with northern countries growing and southern countries in recession.”

Padoan expressed concern about a debt default in Greece and the shaky condition of Spain’s banks, but said the emergency action by the European Central Bank, including a €1-trillion liquidity injection, had so far prevented the debt crisis from spiralling out of control. “If the situation gets worse, there are ways to enhance the firewall capacity, which could include a stronger intervention or role of the ECB,” Padoan said.

In contrast to the eurozone, the US was expected to continue to ­benefit from easy credit conditions and ultra-loose monetary policy. The world’s biggest economy was forecast to grow by 2.4% this year and by 2.6% in 2013. Japan’s 2% growth this year would be boosted by a construction boom following the tsunami in 2011 and  China would expand by 8.2% in 2012 and 9.3% in 2013.

The Organisation for Economic Co-operation and Development predicted that the United Kingdom would recover this year from its double-dip recession. The think-tank maintained its previous 0.5% growth forecast for 2012 and raised its 2013 prediction a notch to 1.9%.

“Fiscal consolidation is a drag on growth,” the organisation said. “However, fiscal policy remains heavily constrained. The ambitious government plan to restore fiscal sustainability remains on track and appropriate.” – © Guardian News & Media 2012
Larry Elliott is the Guardian’s economics editor

We make it make sense

If this story helped you navigate your world, subscribe to the M&G today for just R30 for the first three months

Subscribers get access to all our best journalism, subscriber-only newsletters, events and a weekly cryptic crossword.”

Larry Elliott
Guest Author

Related stories


Already a subscriber? Sign in here


Latest stories

Tunisia struggles to grow more wheat as Ukraine war bites

Since the Ukraine war sent global cereal prices soaring, import-dependent Tunisia has announced a push to grow all its own durum wheat, the basis for local staples like couscous and pasta.

Democracy under serious and sustained attack from within the US

Far-right Republicans and the conservative supreme court are working on a carefully laid plan to turn the US into a repressive regime

Grilling for UK leader Boris Johnson after top ministers quit

The prime minister has faced lawmakers' questions after two of the most senior figures in his government resigned. The finance and health ministers said they could no longer tolerate the culture of scandal

Declare an ‘energy emergency’, says National Planning Commission

The commission said the goals of the National Development Plan, which it is charged with advancing, ‘cannot be achieved without energy security’

press releases

Loading latest Press Releases…