Eurozone crisis threatening to drag US into recession
The eurozone crisis, spurred on by inadequate policy measures, will have global repercussions and is threatening to drag the US with it into recession, according to speakers at a Schroders conference in New York.
There will be an “outright recession” in Europe in the fourth quarter of 2011 and in 2012, according to Nancy Lazar, co-founder of New York headquartered investment research group International Strategy and Investment (ISI).
Lazar said there were two key reasons for this bleak view on Europe’s short-term economic future: first, the oil price shock that occurred in Spring 2011 leading to a crunch on consumer purchasing power.
The second factor is the eurozone crisis, she said, which has been triggered by a series of “missteps in policies and countless missteps today”.
In 2012 ISI is projecting GDP growth in the eurozone will contract by 1%.
This crisis is not just a threat for European economies but on a global scale as well. “I’m quite worried about Europe and its potential impact on the rest of the world,” Lazar confessed.
She underlined problems in the structure of the eurozone, especially over-reliance on Germany as its economic backbone or “mothership”.
“Germany’s deficit is fine but its debt to GDP is so high, if it’s going to be Europe’s backbone it’s going to have a problem,” she said.
According to ISI predictions, German GDP growth is likely to be flat in the third quarter of 2012. Its figures show that 69% of Germany’s trading partners are European meaning that its exports are likely to slow significantly in the coming months.
German banks are also vulnerable to new Basel III rules which will probably affect Deutschebank and Commerzbank dramatically and German bank assets have declined considerably, she said. For these reasons Germany will not be able to maintain growth in the Eurozone alone, Lazar concluded.
She added that monetary policy in the eurozone is too tight and the need for its banks to increase their capital ratios are other key factors drawing Europe into recession.
“The UK is moving into a recession but I don’t view it as a crisis. I view the eurozone as a crisis because of inappropriate monetary policy,” she said.
Despite believing the US has been “pretty darn resilient amid world turmoil,” the eurozone crisis is the “single largest risk to US recovery,” Lazar warned, adding that a fiscal policy crisis in the US in the run up to its presidential elections is not helping matters either.
For Europe to recover, it needs to undergo a “massive labour market reform,” Lazar said. Liquidity needs to be provided which cannot be achieved until some kind of fiscal union is formed, she said.
All eyes will be on the actions of the European Central Bank (ECB) in the run up to the European summit on December 9th, and Lazar is hopeful the ECB will cooperate by further cutting interest rates.
“At some point the ECB needs to step up and carry out more aggressive quantitative easing,” she said, lamenting this is likely to be “later, not sooner”.
By tackling problems at the last minute, the ECB is “more than playing chicken, it is playing with fire,” Lazar asserted. “It should at least step up to the plate and say, I am the lender at the last resort,” she said.
Despite her lack of faith in German growth and the ECB’s approach to the eurozone crisis, Lazar does not believe the eurozone is on the verge of a breakup as Germany, France, Italy and Spain remain committed to it.
“If the eurozone crisis can be resolved one way or another, there is a real chance I can be bullish in 2013,” she concluded.