‘Stabilising’ Europe’s economy

EU policymakers are seeking to protect Europe from the vagaries of the US economy, writes Lorraine Mallinder.

Recession has become something of a dirty word in Brussels circles since the liquidity crisis began in the summer. In the US last month, the Federal Reserve made two dramatic rate cuts in the space of little more than a week. The US administration put forward a package of fiscal incentives that is being pushed rapidly through Congress. But on this side of the Atlantic, EU policymakers have been at pains to avoid mentioning the possibility of a recession. They have been trying instead to soothe jangled nerves with reassuring talk of 'decoupling' and 'automatic stabilisers'.

The essence of 'decoupling' is that while the US may have sneezed, the EU will not on this occasion catch a cold - a few sniffles perhaps, inevitable with rising oil prices and the strength of the euro, but nothing that would warrant the type of medication that the US government is administering to its economy. The 'automatic stabilisers' will provide the wiggle room within budgets to deal with eventualities such as reduced tax revenue and the bloc's economy is strong enough to withstand shocks on the other side of the Atlantic.

So far, that theory seems to be holding up. The sheer weight of the US economy, its consumer market being six times larger than that of China and India combined, suggests that firms will not emerge unhurt from the crisis. But when the European Commission publishes its spring economic forecasts today (21 February), it is not expected to revise EU27 growth predictions for this year to below the 2% mark. The Commission's last growth projection figures for 2008, published at the end of last year, estimated eurozone growth rates for this year at 2.2% and EU27 growth at 2.4%.

European business seems to share in this qualified optimism. Ernest-Antoine Seillire, president of BusinessEurope, the employers' organisation, said last week (11 February) that firms were better prepared than ever to withstand financial market turmoil and a likely tightening of borrowing conditions. "Profitability and balance sheets are strong after years of successful consolidation," he said, "and this will provide ongoing support for capital investment plans."

Structural improvements, such as more flexible labour markets and reductions in public deficits look set to insulate Europe against the worst. While governments will have to be especially vigilant, particularly on public spending and fiscal policy, as Commission President JosŽ Manuel Barroso put it last month, there appears to be no need to "run for the lifeboat". The EU will be steering clear of the type of stimulus package cleared by the US Congress last week (14 February) and will resist, again in Barroso's words, "protectionism or futile attempts to stem financial globalisation".

Kiran Desai of the US Chamber of Commerce says about the threat to the global marketplace: "A common concern is less the immediate impact that one might think of, in terms of the ability of industry and consumers to buy and sell products, but the danger of economic regions hunkering down into a more parochial view of the world in order to protect apparent economic interests."

The challenge for the EU may be to preserve faith in global trade, at a time when protectionism is an easier option. European business might avoid a recession, but it could yet be punished for recessions elsewhere in the world.

EU policymakers are seeking to protect Europe from the vagaries of the US economy, writes Lorraine Mallinder.