Euro zone debt crisis: a danger for the global economy

A report entitled «World Economic Situation and Prospects as of mid-2012» notes that despite some scattered signs of improvement in recent months, the global economic situation is still challenging. Projections are revised downwards as compared to forecasts presented in the WESP 2012 Report in January. Global employment remains the most pressing challenge. The report will be launched on 7 June.

Released by UN DESA’s Development Policy and Analysis Division (DPAD),  the WESP report notes that the debt crisis in the euro area (especially in Greece) remains the biggest threat to the world economy. An escalation could trigger severe turmoil in the financial markets and a sharp rise in global risk aversion, leading to a contraction of economic activity in developed countries.

Following a marked slowdown in 2011, WESP warns that global economic growth will likely remain tepid in 2012 with most regions expanding at a below-potential pace. A further sharp rise in energy prices may also stifle global development.

Four major weaknesses continue to conspire against robust economic recovery:

i) Deleveraging by banks, firms and households, which continues to restrain normal credit flows and consumer and investment demand;

ii) Unemployment remains high, a condition that is both cause and effect in preventing economic recovery;

iii) Fiscal austerity responses to rising public debts deter economic growth and make a return to debt sustainability all the more difficult; and

iv) Bank exposures to sovereign debt perpetuate fragility in the financial sector, which in turn spurs continued deleveraging.

Even if further deepening and spreading of the debt crisis in the euro area can be avoided, economic activity in the European Union is expected to stagnate in 2012.

The jobs crisis continues

Global employment remains the most pressing challenge. Employment-to-population ratios remain below 2007 levels, except in Brazil, China and Germany.

In the United States, despite recent improvements, the unemployment rate remains well above pre-crisis levels, at over 8 per cent. In the euro area, it increased to a historic high of 10.9 per cent in March 2012. It reached alarming heights in the debt-ridden euro area countries: in Spain it had jumped to 24.1 per cent in March 2012 (up 8.6 in 2007), 21.7 per cent in Greece (up from 8), 13.5 in Portugal (up from 8.5), and 14.5 per cent in Ireland (up from 5). In developing countries, in contrast, employment rebounded more strongly.

Policy recommendations

Breaking out of the vicious cycle of continued deleveraging, rising unemployment, fiscal austerity and financial sector fragility requires more concerted and more coherent efforts on several fronts of national and international policy making.

On the fiscal front, it is essential to change course in fiscal policy in developed economies and shift the focus from short-term consolidation to robust economic growth with medium- to long-run fiscal sustainability. Premature fiscal austerity carry the risk of creating a vicious downward spiral, with enormous economic and social costs.

Fiscal austerity has already pushed many European countries further into recession. This is particularly relevant for the debt-ridden euro area economies. Euro area countries have fallen back into recession, following fiscal retrenchment over the past two years. Clearly, the efforts at regaining debt sustainability through fiscal austerity are backfiring in low growth and high unemployment.

For more information: (The report details economic forecast region by region)