The Hindu Business Line : Euro Zone in dire straits

THE STUNTED economic growth, the poor investment flows and the high unemployment levels (over 20 million) have prompted analysts to wonder if the gloom over the Euro Zone — comprising countries that have adopted euro as their national currency — will rise.

Last week, the IMF predicted that economic growth may revive in the second half of this year but it also said that the "fog surrounding the recovery has not yet lifted." The record high oil prices have obviously contributed to the "poor health" of the Euro Zone economies but analysts are also blaming the "claustrophobic global atmosphere". The silver-lining is that key Asian economies, led by China, have provided the necessary boost but that may not bring light to the Euro Zone.

The impasse over European Union and Euro Zone reform is causing concern, not because the French and Dutch rejected the European Constitution but because there is a "lack of basic consensus" among the major Continental powers.

The situation in Italy is grim. Its banking system is in a desperate state with bad loans at record highs and reports of general mis-management. Some Italians have — like certain Centre-Right Germans — even suggested abandoning the euro; this would wreck the European banking system. This is an extremely pessimistic scenario but of late such "loose talk" has been doing the rounds. Record high unemployment rates and oil prices have contributed to this malaise.

Until 1997, when the Socialist Prime Minister, Mr Romano Prodi, took Italy into euro, the country was ranked the third largest economy in the Euro Zone after Germany and France. But since 1998, it has lagged behind France and in all but two years behind Germany. The Centre-Right government of Mr Silvio Berlusconi is yet to offer a credible alternative to boost economic growth.

The economic problems are as evident in Germany and France as the average politician and businessman argues that the European Central Bank should cut interest rates from the already lowest levels, post-War. This could be in the range of half a percentage point, without disturbing the inflation target of up to 3 per cent, set by the ECB.

The European Union expanded from 15 to 25 nation-states last year. Since then, European politicians have displayed a "newly found" quest to establish a "new order" between old Western Europe and the region ruled by Communist regimes till 1998, highlighted by the collapse of the Soviet Union. But as the EU prepares to end the divisions of the past, the disputes of the present cast a long shadow on future growth prospects of the Euro Zone.

To compound the crises, the EU is passing through a phase of "leadership vacuum". Of the major leaders, the German Chancellor, Mr Gerhard Schroeder's term could come to an end in September. In France, Mr Nicholas Sarkozy, in his mid-forties, is fast emerging to replace the President, mr Jacques Chirac, in the 2007 general election.

In Britain, the Prime Minister, Mr Tony Blair, is basking in new-found glory and popularity for handling the terrorist crises but on the economic front it is a grim situation as the consumer debt crisis deepens and bankruptcies hit 40-year record. According to latest estimates, one lakh Britons may go bankrupt each year due to high rate of borrowing from financial institutions and high consumer spending. In Germany and France too, the level of bankruptcies has risen.

Hence, faced with "leadership vacuum", record high unemployment and oil prices and in the backdrop of recessionary economic conditions, the European Union countries are languishing at below-two per cent economic growth rate. If this trend continues, the prospects of a negative growth in the near future cannot be ruled out. Whither the European solidarity?

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