Sleepless Nights for Czech Finance Minister as Eurozone Economy Sputters

By Jason Simpkins
Managing Editor
Money Morning

Economic confidence in both the Eurozone and greater European Union (EU) hit a record low in December, adding to an already long list of challenges that face that region.

And even though policymakers have an economic stimulus package in place, confusion over future fiscal policy lingers. 

The European Union certainly has a full plate right now. Large portions of the 27-nation bloc are lumbering through the depths of winter without heat, as the Ukraine and Russia continue their row over gas prices. The region is also pressing Israel to end military operations in Gaza, although they're applying that pressure with little or no help from the United States.

Still, the EU can't lose sight of its own economic crisis, a crisis of confidence that has emerged from the collapse of the global financial system. 

Confidence in the EU economy hit a record low in December, the European Commission said today (Thursday). The Commission's economic sentiment indicator (ESI) fell 7.0 points to 63.5. The ESI for the Eurozone -the 16 countries that use the euro -fell 7.8 points to 67.1. Both readings are the lowest since the indicator was launched in 1985.

Confidence plummeted across all sectors, which suggests the recession that began in the second quarter of last year.

"December's EC survey brings more alarming evidence that the recession in the Eurozone is deepening rapidly," Jennifer McKeown at consultants Capital Economics told the Strait Times.

The Eurozone economy contracted by 0.2% in both the second and third quarters of last year, and most analysts forecast much steeper contractions this year.

Germany's Ifo, France's INSEE and Italy's ISAE slashed their joint estimate for Eurozone growth in the fourth quarter of 2008 to a contraction of 0.6% from an October projection of a flat reading, Thomson Financial reported.

The three think tanks said Eurozone gross domestic product (GDP) will contract by 0.4% in the first quarter of this year, down from a previous prediction of 0.1% growth, and will shrink by 0.2% in the second quarter.

The Organization for Economic Cooperation and Development (OECD) predicts that the Eurozone economy will contract 0.5% in 2009, in line with the International Monetary Fund's (IMF) most recent forecast.

Solving the region's economic contraction will not be an easy task. In December, the EU pledged economic-stimulus steps worth $272 billion (200 billion euros), or about 1.5% of GDP, to combat the fallout from the financial crisis. But while some member countries support even more government spending as a remedy to the crisis, others continue to hold the line of fiscal discipline.

"Some say this is a crisis that has to be tackled through expansion," said Miroslav Kalousek, the Czech Republic's finance minister.

Others say the crisis should be accompanied by even more rigorous discipline and that, if discipline isn't adhered to, we'll have problems refinancing debts," Kalousek added.

Kalousek, whose country took over the EU's rotating presidency on Jan. 1, is an advocate of fiscal discipline. That aligns him with the likes of Germany, Poland, and Belgium and sets his position opposite to that of Ireland, Spain, and the United Kingdom, which have been among the hardest hit by the financial crisis so far.

"This world crisis was not triggered by the financial policies of this or that government. It was a total crisis of confidence on the banking and financial markets," Kalousek told reporters yesterday. "For that reason, I think it's extremely important that the lack of confidence should not be made even worse by unreliable policies on the part of certain countries."

Kalousek has vowed to remain impartial and open to compromise with regard to all matters facing the 27-nation European contingent, despite his position. Even so, he speaks openly about his anxiety over mounting debt.

Said Kalousek: "Often I'm woken at night by a nightmare -how am I to refinance the debt?"

News and Related Story Links:

  • Strait Times:
    EU confidence hits record low