The European Summit: Don’t Forget the Economics

09 Dec 2011, by Duncan Weldon Guest in Economics

The early analysis of the European summit are concentrating on the politics – Britain’s return to a form of ‘splendid isolation’ and what  this means for the UK’s relationship with the EU in the years to come. (The  Economist’s Bagehot is especially good on this).

Whilst the politics are of course of huge importance, I  can’t help but feel that the economics are a more immediate concern in the days, weeks and months ahead. This summit was after all about resolving the Eurozone crisis not about the UK’s relationship with Europe.

The news on this front is bleak.

Citi  now expect that European GDP will fall for the next six quarters something  not experienced by Japan in the 1990s. 18 months of renewed recession is a grim  prospect.

Meanwhile the  European Banking Authority believes that Eurozone banks face a capital  shortfall of €115bn. This morning Moody’s downgraded the ratings of  three large French banks.

S&P  has placed the sovereign ratings of the entire zone on negative outlook.

Yields on Italian and Spanish government bonds are still  climbing whilst sovereigns and banks face having to issue a great  deal of debt in the coming months and what look like increasingly  unattractive rates:

Euro-area  governments have to repay more than 1.1 trillion euros of long- and short-term  debt in 2012, with about 519 billion euros of Italian, French and German debt  maturing in the first half alone, data compiled by Bloomberg show. European  banks have about $665 billion of debt coming due in the first six months,  according to Citigroup Inc., based on Dealogic data

Against this backdrop we have what FT Alphaville are calling  another ‘Eurofudge’,  another short-term compromise that fails to engage with the real issues.

Again policymakers are passing the buck to the ECB, an ECB  that doesn’t seem especially interested in taking the necessary steps.

As  Robert Peston wrote this morning:

Apart from its political and  constitutional relationship with the eurozone, something else is at stake for  the UK at the European Union council: whether we are propelled back into  hideous and serious recession.

British jobs – lots of them – are at risk if the eurozone doesn’t sort itself  out.

And right now, it doesn’t look as though eurozone leaders have come up with a  sustainable solution to their debt crisis.

Today’s  net trade figures (which were welcome good news) underline this point. Despite  the attention paid to the news that exports to China were doing well, 46% of  our exports last month went to the Eurozone.

Their problems are our problems and amidst the big political  questions the Eurozone is sliding into a nasty recession and financial crisis, one which could have a huge impact on the UK.