Analysis: World economy counts cost of euro zone dithering

Thu Nov 24, 2011 2:07pm EST
 
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By Alan Wheatley, Global Economics Correspondent

LONDON (Reuters)- From credit bottlenecks in eastern Europe to slower growth in China, delays in tackling the euro zone's debt crisis are causing ever-greater economic and financial damage well beyond the borders of the 17-nation bloc.

As politicians dither over how to share the costs of cleaning up the mess and preventing a recurrence, concern is mounting among policy advisers and academics that Europe could be condemned to several years of sluggish growth as excess debts are gradually worked off.

And wrangling over how to pay for decades of debt accumulation is not limited to Europe.

As Francesco Garzarelli of Goldman Sachs has noted, the political stalemate over how to reduce the U.S. budget deficit is another example of the difficulties advanced economies face in reforming the 'social contract' against a background of repairs to overstretched private sector balance sheets.

"We're in for a very slow growth period in the world. This is going to define the next 15 to 20 years," said one international official who was critical of the "intoxicating" monetary and fiscal policies that turbocharged growth and enabled the West to live well beyond its means until the bubble burst in 2007.

Figures on Wednesday underlined how difficult it is to shed debt, or deleverage, without throwing a spanner in the wheels of the economy. The euro zone's private sector is likely to shrink in November for the third month in a row, according to a survey of corporate purchasing managers, pointing to economic contraction this quarter.

A companion survey in China showed an even sharper deterioration in business sentiment, and economists were quick to make the connection with Europe, which buys about 20 percent of China's exports.

"We see downside risks to our below-consensus forecast of 8.4 percent GDP growth (in China) for 2012, mainly from the deterioration in the euro area growth outlook (a mild recession looks increasing likely) and the ongoing and widespread property market correction in China," analysts at Barclays Capital in Hong Kong said in a note.   Continued...