EU-DIGEST

World will be forced to conserve energy this time - by Hamish Mcrae

This time it is different. True, this is an oil shock akin to those that struck the world economy in the 1970s, for the price of oil -- even allowing for inflation -- is now a lot higher than it was at the 1979 peak. Those shocks pushed the world economy into two recessions, in the mid- 1970s and the early 1980s, and helped drive inflation into double digits in most of the developed world. Unemployment soared as interest rates were raised to try to curb inflation. But then the oil price fell back again as new fields came into production and countries made a start on conserving oil.

Labels: US Economic Meltdown, US recession, World Economy

The US Crumbling Economy: America's Coming Garage Sale - by Michael Schuman

For years, Americans have reveled in profligate, load-up-the-back-of-the-SUV-at-Target excess, much of it paid for by credit cards, home equity or other loans. The binge has produced some supposedly healthy economic growth and provided everyone lots of nice stuff. But now debt collectors from around the world are knocking. That's why today's turmoil in U.S. financial markets will end in a massive transfer of wealth from America to the rest of the globe.

There is, simply put, no way out of this situation for America. If you don't believe me, perhaps you'll believe Warren Buffett. The Sage of Omaha predicted this very scenario in 2003 in an article in Fortune. He tells the story of two fictional islands, Thriftville and Squanderville. In Squanderville, the residents live beyond their means by importing from Thriftville in return for IOUs. Eventually, Thriftville converts this debt into Squanderville assets until Thriftville owns all of Squanderville. America, Buffett warned, was facing the same fate. "Our trade deficit has greatly worsened, to the point that our country's 'net worth,' so to speak, is now being transferred abroad at an alarming rate," Buffett wrote. Americans, meet Squanderville.

Labels: economic meltdown, US, US recession

What will be happening to the US Economy in 2008?

The deflation of the largest and longest-lasting housing bubble in U.S. history is now making it all but inevitable that the United States will enter a recession in 2008. The last few weeks have seen a remarkable degree of consensus across most of the economics profession around the need for a sharp short-term stimulus to the economy. The goal is to avoid a recession or, in the likely event that that isn't possible, to make the recession shorter and more shallow. The unusual level of agreement around the need for strong measures stems from the economic profession's familiarity with the huge economic and social costs of recessions. In this paper, we use the experience of the last three U.S. recessions --1980-82, 1990-91, and 2001-- to make some simple predictions about the likely impact of a recession on a series of important economic and social outcomes. The last three recessions provide a useful benchmark because two of the recessions -- 1990-91 and 2001-- were relatively mild as recessions go, while the 1980-82 recession (actually two back-to-back recessions) was the worst since the Great Depression of the 1930s.

Labels: US Economy, US recession, World Economy

US Service sector collapses-will there be repercussions for Europe? - by Vinnee Tong

Lingering hopes that the U.S. economy might avert a recession withered Tuesday after the nation's service sector — its banks, travel companies, contractors and stores, among others — shrank for the first time in five years.Moving company Allied Van Lines filed for bankruptcy on Tuesday, saying it had fallen victim to the downturn in the housing market and its own heavy debt load. Charming Shoppes Inc. — which runs the Petite Sophisticate and Lane Bryant clothing stores — said it would cut 200 jobs and close 150 stores. "We're trying to keep that economic news really quiet because so far our visitors don't know about it," said Nicki Grossman, president of the Greater Fort Lauderdale Convention & Visitors Bureau. "We haven't seen the compression that everybody around the country is worried about." Ryan Kaminski, who runs a Mexican restaurant in Sarasota, said the squeeze he has felt as both a business owner and a consumer since last summer is growing worse. The restaurant's traffic started thinning out last summer, pulling 2007 sales down 10 percent from a year earlier, and so far this year sales are down 15 percent from a year ago.

Note EU-Digest: As fears of a U.S. recession raise the likelihood of a global economic downturn, European executives are also more pessimistic, unlike their counterparts in emerging markets in the Pacific where solid economic expansion is set to keep earnings growth intact.More than half of company chiefs surveyed in Latin America and Eastern Europe said they were "very confident" of revenue growth this year. Their optimism contrasts with just 44 percent of West European executives who were so confident, down from 52 percent a year ago.

Labels: EU Economy, US Economy, US recession

Dutch Finance Minister Bos: "No Risk Of Economic Recession In Europe"

"There is no risk that Europe's economy will experience a recession this year, Dutch Finance Minister Wouter Bos said Tuesday. And speaking to reporters ahead of a meeting of finance ministers from the 27 members of the European Union, Belgian Finance Minister Didier Reynders concurred, but added there is a risk of a slowdown. Reynders added that the E.U. finance ministers, known as Ecofin, will monitor developments in global financial markets "very closely." European and Asian stock markets plummeted Monday, and Asian markets lost further ground Tuesday. But Jean-Claude Juncker, who heads the Euro Group of finance ministers from the 15 E.U. members that use the euro, repeated his view that the euro-zone economy is in better shape that its U.S. counterpart, and added that "it won't happen that we in Europe" have to resort to launching fiscal stimulus packages, as the U.S. administration did last week. Asked if E.U. economies would enter recession, Bos said "no, no." He added that the Dutch economy was well positioned to deal with the turmoil in financial markets, which he attributed to "uncertainty" about the outlook for the U.S. economy. "The fundamentals are very good," Bos said. "We can take a blow and still be healthy."

Editorial Note EU-Digest: "Mr. Wouter Bos probably is right, based on the actual situation. Euro area's GDP in 2007 will be about $11.9 trillion(according to IMF estimates). U.S. imports from the Euro area have totaled $245 billion in 2007 through November; let's say $267 billion for the full year. So the Euro area's exports to the U.S. account for just two and a quarter percent of its GDP. How much of a drop in US imports (Europe's exports) might we have in a U.S. recession? Last recession US imports fell by 5.5 percent. If with the fall of the dollar, US imports really drop, by say ten percent. That would cut 0.2 percent off Europe's growth rate, plus multiplier effects if any. That by itself does not send Europe into recession. As for the echo effect, U.S. exports to the Euro area amount to about 1.3 percent of US GDP. So by taking 1.3 percent of a 0.2 percent drop and you get a trivially small number, less than three thousandths of one percent. So forget an echo recession in Europe. That is if we base it only on what is happening in the US."

Labels: EU Economy, US recession, Wouter Bos