Euro Zone Already in Recession, Says World Bank
November 25th, 2011
The Institute of International Finance (IIF) has said that the situation in the euro zone “has deteriorated” in the last month dropping “into a new recession,” which will shrink the European economy by one percent of its Gross Domestic Product (GDP ) in 2012.
“The situation in the euro zone has taken a serious turn for the worse in the past month. The economy has entered what we consider to be a new recession,” said the IIF in its latest report on global economic prospects for 2011 and 2012.
According to the IIF, which includes over 400 financial institutions from around the world, this new recession will cause “an increase in budget deficits and undermine the quality of financial assets even more” in the euro zone.
El Mundo reported that for the last quarter of 2011, the banking association predicts a contraction of 2% as a result of the credit crunch and fiscal adjustments.
The IIF was the entity which, on behalf of the private banking sector, led the negotiations with the European Union institutions in which it was agreed last month to remove 50% off of the Greek debt.
Criticized in this respect, European political leaders who are struggling to “stay afloat” in this difficult situation, have regretted that some of their actions “are making the problem worse, not better.”
“The program of debt relief for Greece is scaring investors from other peripheral markets, and banks are being forced to raise their capital ratios quickly, which will accelerate the contraction of their balance sheets,” said the study, led by Phillip Suttle, IIF chief economist.
Also it stressed that key countries, especially Italy, “have been painfully slow to adopt structural reforms”.
The group of bankers insisted that the European Central Bank (ECB) is the only institution capable of providing “realistic support” in the coming weeks and said that the expansionary policy of the ECB is likely to be continued at its next meeting in December.
The IIF warned that “the weakness in the euro zone may extend to the rest of the world, mainly through the banking sector”.
On a positive note, the study highlighted the growing demand from emerging markets in the global economy, what it called a “lifeline”, and added that the behaviour of the U.S. and Chinese economies in recent months has been “better than expected.”
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