By Anubhav Gupta

Edited by Edited by Namrata Caleb, Senior Editor. The Indian Economist

This week, at the G20 Summit in Brisbane, David Cameron, the Prime Minister of the United Kingdom, issued a stark message to the world leaders assembled there. He warned that “red warning lights are flashing on the dashboard of the global economy” in the same way as when the financial crash brought the world to its knees six years ago. This was accompanied by comments made by Christine Lagarde, the Managing Director of the IMF, expressing fears that a diet of high debt, low growth and unemployment may yet become “the new normal in Europe”.

A number of key indicators point towards the very real possibility of the Eurozone, collectively the world’s biggest economy, falling into recession for the third time.

‘A spectre of stagnation haunting Europe’

Only days ago, the Bank of England governor, Mark Carney, claimed that a spectre of stagnation was haunting Europe. A majority of the 18 economies that comprise the Eurozone are characterized by high unemployment, falling growth and falling prices. A European Central Bank (ECB) survey showed that inflation would remain at worryingly low levels before picking up slightly next year. The annual inflation rate in the Eurozone was near a five-year low of 0.4% in October and the ECB expects a rate of 0.5% for 2014 – well below the target of close to 2%.  The IMF has warned that Europe faces a 35-40 percent chance of contraction.

German Tensions

Germany, Europe’s manufacturing powerhouse, narrowly escaped falling into recession and grew by just 0.1% quarter-on-quarter in the third quarter of 2014. This has forced European leaders to admit the credibility of the threat of recession.

More significantly, German opinion seems to be divided on the direction that the Europe needs to take. German Finance Minister Wolfgang Schaeuble said in September that Germany would not take on new debt next year for the first time since 1969. The decision has irked European peers who want Germany to increase investment to help revitalize the Eurozone economy.

Over the past few years Germany’s Central Bank, the Bundesbank, has been at loggerheads with the ECB. There is speculation that the ECB could announce it is ready to buy euro zone government bonds as it tries to tackle the low growth and disinflationary environment in the region. Germany is reluctant for the ECB to take on the debt of other euro zone nations, however, and Jens Weidmann, the president of the German Bundesbank has said it would be a “dangerous path” for the ECB to take. The popular opinion in Germany is that the hard-working Germans have been bailing out their struggling Southern European neighbours for far too long.

As the largest shareholder in the ECB, the Bundesbank wants Europe to take the lead from its policies. This sentiment was echoed by Juergen Stark, a German economist and former executive board member of the ECB, who said that, ‘the European central bank should not do anything without Germany’s consent.’ Stark quit the ECB’s Governing Council in 2011 over the bank’s decision to potentially buy government bonds, which he strongly opposed. And now, the Germans and the ECB seem to be locked onto a collision course again.

Russia

Russia’s authoritarian President, Vladimir Putin, was widely criticized at the G20 Summit for Russia’s involvement in the Ukraine conflict and seemed to be finally getting ready for reconciliation with the West. This was not a mellowing down of the leader who rules the sixth-largest economy in the world with an iron fist; rather it was a response to the crippling sanctions introduced against Russia by Europe as punishment for the Ukraine conflict. Putin warned at the summit that Europe could only be one or two rounds of sanctions away from pushing Russia into a deep recession. Western Europe is almost completely dependent upon Russian oil and natural gas for meeting its energy needs. Russia has warned that if the sanctions continue, more than 300,000 European jobs could be at risk, further adding to European woes.

Weak global cues

Rounding off a miserable week for the global economy, the Japanese economy unexpectedly fell into recession. Japan’s grand economic experiment, a combination of fiscal discipline and monetary stimulus, on which Europe was supposed to model its recovery, is collapsing. This should prompt the ECB to take a hard look at its own plans of quantitative easing. Further, growth in China is slowing for the first time in a decade and the Brazilian economy’s growth has significantly weakened.

David Cameron singled out increased partnerships with emerging economies like India and China as way out of Europe’s woes. However what is vital is the ECB analyses the possible effects of its bond-buying program and reaches a consensus with Germany. Europe needs to pull together, or the voices questioning the rationale of a European Union will only grow louder.

Anubhav Gupta is a first-year student of Economics at St. Stephen’s College, University of Delhi. As a future investment banker, he strives to explore and learn about every nook and cranny of the financial markets. He is an avid reader with a particular interest in philosophical and historical fiction. He devotes the rest of his time to running and globetrotting.

Posted by The Indian Economist | For the Curious Mind