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Systemic Fragility Haunts Europe

If you think the economic and political crisis in the United States is unnerving, you should check out the view across the pond. The mood in Europe is grim. On the streets of European capitals, at family gatherings, and in corporate boardrooms, what could turn out to be the panic of the decade is simmering as companies and individuals worry about how the future of the continent will evolve.

The fiscal crisis engulfing several European countries, including Greece, Ireland, Portugal, Spain, and Italy, is threatening to spill over into the rest of the continent, weakening consumer confidence and creating a nightmarish image of a region about to implode. Businesses are fretting that the fragile economic recovery they were nurturing will fizzle out, and the word “downturn” is being murmured again. Especially in the electronics sector, which depends so heavily on corporate IT and consumer spending, the outlook isn't pretty.

Is this the new reality, and do Europeans think their leaders are effectively managing the crisis? The answers, respectively, are Yes and No. The new reality is that of uncertainty about the future, and, absolutely, the political leadership has been slow to grasp the huge scope of the challenges facing the continent, hence their mostly hesitant response so far. The business climate is growing worse, and the financial crisis involving the euro is creating an atmosphere of deep uncertainty for families, too.

It’s obvious that businesses are being hit across the region, but my greatest fear is that the seeds of uncertainty being sown across the major economies could force a shutdown in consumer spending and corporate capital expenditure. If this were to happen, what started as a fiscal crisis in the backwaters of Greece and Portugal could become a tsunami sweeping Europe back decades and hurting businesses across the world.

European leaders may finally be waking. In a letter, Jose Manuel Barroso, president of the European Commission, warned the 27 EU members the Spanish and Italian sovereign debt problems represented a “cause of deep concern.” He further said:

    Markets remain to be convinced that we are taking the appropriate steps to resolve the crisis. Markets highlight, among other reasons, the global economic uncertainties due to both economic growth and the protracted decision on budgetary adjustments in the US… Whatever the factors behind the lack of success, it is clear that we are no longer managing a crisis just in the euro-area periphery.

Which way out? Some industry observers have suggested even further fiscal tightening, which is like rescuing a drowning man by hauling him out with a noose around his neck. Businesses are beginning already to cut back on spending, which will add to the already high unemployment conditions in Europe. The overly subscribed current welfare system will certainly fail to contain what might result if this vicious cycle continues.

Europe will eventually ride this out; it has endured worse. But what it needs right now — and what will get businesses hiring again and consumers spending — is the hope of a better tomorrow, and that exactly is what is sorely lacking right now. Sony Kapoor of think tank Re-Define put it best when he said in a BBC report: “Without a clear hope of a better tomorrow that only a significant reduction in debt stock can bring, depositors and taxpayers will continue to flee, entrepreneurs to emigrate, and growth-inducing private investment will not take off.

8 comments on “Systemic Fragility Haunts Europe

  1. mfbertozzi
    August 8, 2011

    Great article Anna, your perspective is reproducing a fair picture of real status, actually. Does better tomorrow really exist for UE? Imo, I personally think there are still green horizons to explore, but clear projects from Govs are needed. Speaking about Italy for example, we are only assisting to fiscal pressure which is raising day-by-day, everything but no serious programs for launching new initiatives for education, tech investments, for rasing jobs instead of jobs cut, have been outlined by Government and major Institutions. What happened for Fiat Group, one of the biggest automotive producers in the world? That Italian company, in order to follow a strategy for making itself bigger avoiding to leave huge quotas in car market, has invested outisde Italy…in US, acquiring Chrysler. One year after, economics results are very positive and default for US Chrysler was avoided. It seems managers and people within the company are good and hold good talent, but to survey the only way was to invest outside their country….

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

  2. FLYINGSCOT
    August 8, 2011

    It has been said that when USA sneezes the RoW catches a cold.  Market sell offs are also being fueled by the growth figures in the USA, its mountain of debt, its struggle to reach a deal in Congress to address that debt and the downgrading of its credit rating.  These are serious issues affecting the RoW.   

  3. DataCrunch
    August 8, 2011

    @Flyingscot – I agree, the current US economic climate and the recent downgrade of the credit rating by the S&P definitely does not help matters.  The situation will remain fragile until the US comes up with a solid plan to fix it economy and project a feasible and sound economic plan that the RoW can once again have confidence in the US economy.  Then the RoW will follow with improvement to their economic situations.      The world needs solutions and renewed optimism and it starts with the US taking the lead.

  4. jbond
    August 9, 2011

    @Dave,

    I think your analysis of the situation is dead on. The RoW has been feeling the pain of the financial collapse in the U.S. that started in 2008. Some economies have done fine, while others have failed or come close to it. The world needs a positive outlook on the future to get things moving in the right direction. This all starts with how the U.S. handles its debt crisis and looks to regain its AAA rating. U.S. law makers and financial experts need to get moving quickly to regain some momentum and not only help the U.S. economy, but the RoW.

  5. Anna Young
    August 9, 2011

    @mfbertozzi, thanks for your comment. I agree that Europe still requires to explore further “green horizon”. I strongly believe Europe will certainly explore “green horizon” and ride out this fiscal debts challenges.

    The urge to unite and deal with this ongoing problems is echoed by some European leaders and I do agree as there is strength in unity. I'm sure you will agree with me that European leaders need to urgently come up with plans and strategy  to boost consumer spending as well as foster ideas to encourage businesses develop and create more  jobs. 

     

  6. Anna Young
    August 9, 2011

    @jbond, Dave & Flyingscot, your analysis of the global crisis are accurate. Europe and RoW are still reeling from the after effect of the 2008 crisis which stem from USA.

    As stated by Flyingscot, that” when America sneezes the RoW catches the cold”. RoW cannot cure their cold in as much as America too had been unable to curtail its sneezing. Global economy needs a revival. Europe, America will need to come up with a workable strategy that will help to manage the current and ongoing fiscal debts crisis as well as  positively impact businesses and foster spending again.

  7. mfbertozzi
    August 9, 2011

    I agree with you Anna, definitely. For now, a part some “echoed” invitations for teaming, European leaders didn't present any real plan for resuming back the growth. Recent drammatical events in London for example, represent once again how is urgent from leader, real plans trusted by citizens, in principle. If they leave leadership is in charge to Central EU Bank, the only way will be cut costs. We trust in a better tomorrow.

  8. Ms. Daisy
    August 30, 2011

    Anna, great post on the current state of affairs of Europe. The post also struck me as a mirror image of the current situation in the US. Your conclusion of “what will get businesses hiring again and consumers spending — is the hope of a better tomorrow” seems familiar too. It was President's Obama's call for hope of a better America in 2008.

    Unfortunatley like Europe, the self interest of individual states in the US and countries in Europe drowned this drumbeats hope. As long as national and party interest takes the forefront, we will continue on this downward free fall to global financial doom. This will also be the precursor of breakdown of law and order which we have started seeing that in London and Philadelphia.

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