Global Economics

Brussels Says European Recovery Fragile


European Commission report says a strong euro, rising unemployment and the ultimate withdrawal of stimulus measures threaten recent economic improvements in eurozone

Considerable uncertainty surrounds the moderate economic improvements seen in the euro area in recent months, the European Commission said on Monday (21 December).

The 16 countries that share the euro currency saw quarter-on-quarter growth of 0.4 percent in the third quarter of 2009, largely due to the extensive stimulus measures rolled out across much of the bloc.

But the ultimate withdrawal of the support measures is casting considerable doubt over the region's expansion prospects for the coming years, said the commission in its quarterly report on the euro area.

The EU executive said the outlook ultimately "depends on the ability of the banking sector to increase the present levels of lending to the economy."

It added that continued European job losses were a "source of concern both socially and economically." Euro area unemployment stood at 9.8 percent in October—equating to over 15 million men and women without work.

The Netherlands has the lowest unemployment rate in the common currency area, at 3.7 percent, while Spain brings up the other end of the scale, with unemployment standing at 19.3 percent.

Currency worries

The commission also issued a stark warning regarding the current strength of the bloc's common currency, saying a further rise relative to other currencies could be a "serious concern" for the more liberalised eurozone economies.

Monday's reports says the euro is already overvalued by seven to eight percent relative to other major currencies, reducing the attractiveness of the bloc's exports.

Despite the exaggerated strength however, EU exports are recovering, a promising sign for 2010 as exports are usually the euro area's first indicator of recovery once economic growth settles in, the report said.

The euro currency has risen considerably against the dollar in recent months on the back of perceived economic improvements, although recent troubles in Greece have caused it to drop back slightly.

The commission has indicated it will announce proposals early next year on how to reduce Greece's deficit, set to exceed 12 percent this year.

The report also pulled no punches regarding China's renminbi currency, widely perceived as being undervalued.

"The sustained large current account surplus and the accumulation of foreign exchange reserves provide evidence of a significant undervaluation of the renminbi," it said.

The fixed exchange rate policy is also contributing to loose monetary conditions in China, fuelling the risk of asset price bubbles," it adds.

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