Is Europe in a Recession

February 28, 2012

FE442 Executive Summary: Is Europe currently in a recession, why or why not?

Europe is currently in a recession. The most recent data on unemployment and domestic consumption, in combination with the imminent debt crisis indicates a decline in Europe's economic growth. The data does not fully match indicators for a full-blown recession, and Europe's trade surplus has increased, but the data does not indicate economic growth.

GDP growth rates are half way to a recession. Most economists define a recession as two consecutive quarters of declining GDP . The Eurozone's GDP has only shrank during the past quarter . The first quarter of 2012 will determine if Europe is technically in a recession, but that data will not be released until later this year. However, the commissioner of the EU economic and monetary affairs, as well as the International Monetary Fund, both forecast a contracting GDP for the Eurozone this year, of 0.3% and 0.5% respectively.

Unemployment rates are at an all time high for the Eurozone. Although it has not increased by 1.5% in the past 12 months, the unemployment rate is on an upward trend. Unemployment in the Eurozone has risen to 10.4% and has not decreased since April 2012.

Long-term unemployment is also a apprehension for growth: In 2010, 3.8 % of the labor force in the European Union had been unemployed for over one year, and 1.8 % of the labor force, had been unemployed for more than two years.

The European debt crisis causes a decrease in growth. Barclays Capital estimates that the Eurozone needs to raise 218 Billion in the first quarter of 2012. The high debt will force some periphery countries to increase austerity measures and cut spending. Moody recently downgraded Italy, Portugal and Spain, and put Austria, Britain and France on negative outlook, which will decrease also decrease spending in Europe, resulting from higher borrowing costs for these countries.

Exports could keep the recession mild. The devaluation of the Euro against the dollar has been beneficial for the Eurozone. Eurozone exports were 13% higher in 2011 than in 2010, and the trade surplus widened from 6.3 to 9.7 billion Euros. With an increase of the global economy and the US capital markets, exports are likely to increase and keep the Eurozone out of a deep recession.

Recent data does not support economic growth in the Eurozone. In combination with a reduction in spending from the immanent debt crisis, a constricting economic future is likely. However, the reduction in growth from austerity measures might be offset by the Eurozone's trade surplus, which could keep the recession mild.

Bibliography

http://www.economist.com/node/12207987