by Piet Coetzer

Recessions and depressions

Return of recession will test European social cohesion

Eurozone
Euro.jpg

The violent protests and strikes that have become endemic in countries across the European Union are a sign of things to come as the news sinks in that the second economic recession since the 2009 financial crisis is now a reality. A popular backlash is building against austerity measures, resulting in cuts to public services and what amounts to internal devaluation policies. 

To date, these policies have targeted wages and Europe’s high levels of social protection in the seriously indebted economies, aiming to avoid debt defaults and to restore competitiveness.

But it is becoming increasingly clear that for most European countries, their ever growing spending-to-GDP ratios are fast becoming unsustainable.

The latest data has shown that although French and German growth proved resilient, the eurozone as a whole slipped back into recession between July and September this year, contracting 0.1% on top of a 0.2% drop in the second quarter.

The drop in two consecutive quarters means that eurozone’s €9.4-trillion ($12-trillion) economy is now technically in the midst of another recession – what has become known as a double-dip recession.

Most analysts expect both the German and French economies to contract in the fourth quarter for the first time since the end of 2011. For all of 2012, the European Commission sees the eurozone contracting 0.4%, while growing just 0.1% in 2013.

The data further revealed that Greece's economy has contracted for a record 17th consecutive quarter despite severe austerity measures. Its economy is now 7.2% smaller than it was at the same time last year. In fact, in the case of Greece, the term 'depression' instead of 'recession' would now be closer to the truth.

On the back of this news, Greece was hit by another wave of protests, demanding an overhaul of austerity programmes.  

But eurozone policymakers remain split over how to handle Greece's growing debt, while in reaction to the recession news for the EU and lack of progress in dealing with a looming fiscal crisis in the United States, European stock markets have fallen markedly. Business surveys point to difficult times ahead and the public's backlash to austerity polices is growing.

In the meantime, millions of workers went on strike across Europe on Wednesday last week to protest government spending cuts that they claim are driving the region into a deeper malaise.

Unemployment in the eurozone is expected to reach record levels of more than 11% this year, which means 25 million people will be without work this Christmas. And it is expected to get worse, with some forecasts predicting it to go up to 13% next year overall and to as much as 23% plus in Greece.

A high risk of violent protests is evident in the fact that the unemployment level among the youth in Greece could go as high as a massive 56%, while in Spain it has hit 55% and climbing.

There is a dangerous groundswell of injustice, heightened by the belief that governments have ratcheted up borrowing to fund aid and guarantees worth trillions to bail out failing European banks while deep and painful cuts are being made to social spending.

On a macro level, just about the only good news is that the threat of a eurozone breakup has diminished after the European Central Bank promised to buy eurozone government bonds in potentially unlimited amounts, should a country first seek help from the bloc's permanent rescue fund. But that is scant comfort for the millions of ordinary people in Europe who have become dependent on the 'welfare state'.

Painful adjustments to their way of life for many — if not most – European societies, accompanied by social turmoil in the months and maybe years ahead, at this point look inevitable.

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