Recession in Western Europe

 Introduction
The Western Europe famously known as the Euro-zone consists of the following
countries :- Andorra, Austria, Belgium, Denmark, Finland, France, Germany, Gibraltar,
Greece, Iceland, Italy, Ireland, Liechtenstein, Luxembourg, Malta, Monaco, Norway,
Netherlands, Portugal, San Marino, Spain, Sweden, Switzerland, United Kingdom.
The recession: The spark of recession was initiated in U.S. and engulfed most of the
world. Conditions deteriorated rapidly in September-October 2008 due to major bank
failures inviting government intervention and bailouts.
Western Europe was hit hard by the 2008 global financial downfall. Almost all major
economies of Western Europe suffered major recession effects. Unemployment,
consumption and exports are areas of major concern. Decrease in inflation is proving to be
beneficial to the consumers but there is a fear of deflation which will further worsen the state
of the economy. The ability of the various governments to coordinate the monetary and fiscal
policies has proven to be a good sign. Western Europe is expected to see a positive turn in
2010.
 The Impact

Finance and real estate typically make up between a fifth and a third of GDP of
Western European economies. Due to the crisis in the financial sector, consumers and
businesses are having difficulties obtaining credit and so demand and investments are
softening.
The countries that use the euro currency will shrink by 4 percent this year, more than
double its January estimates, when it forecast a 1.8 percent contraction for the EU and a 1.9
percent decline for the euro-zone area. Germany, the biggest economy in Europe, will
contract by an estimated 5.4 percent as global demand dries up for its high-value goods such
as cars and machinery.
Decreases in exports as well as industrial outputs are causing the economy to shrink -
and will see some 8.5 million jobs shed from the EU in 2009 and 2010, more than wiping out
the number of new jobs created in the last two years. Unemployment will hit a record of
11.5 percent next year. As the strong position of the euro makes the goods of the European
countries expensive to the rest of the world, there will be a huge decrease in the exports ( by
12-15%).
It also said a bad debt spiral from falling house prices could trigger a wave of business
bankruptcies that lift unemployment and lead to more debt defaults. EU banks have already
written down euro 290 billion in losses, it said, calling for close-monitoring of debt defaults,
particularly in eastern Europe where many western banks may face bad loan books as
housing prices collapse and unemployment rises.

 Sectors Affected

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 Recession in Western Europe

 Banking Sector
The recession which started in USA in 2008 had brought about major changes in the
financial situation of countries of Western Europe. The financial crisis started in USA but
affected a large number of Western Europe countries. A large number of sectors were
affected but the banking sector was the chief among them. The banking sector was affected
because a lot of banks in Western Europe were deregulated. Government control was
minimal.
A large number of banks collapsed in Western Europe. The countries were the
banking sector was largely affected are Iceland, Ireland, Spain, Belgium, Ukraine, Russia and
many others. A lot of banks were deregulated there. So effectively there was no government
control. Banks were largely affected to the US financial market and a lot of them had toxic
assets. The banks had participated a lot in complex areas such as hedge funds. Financial firms
in Europe tool unnecessary risks in the US mortgage market which left them without enough
cash on hand to survive a US housing crash that exposed them to hundreds of billions of
dollars in losses. In Iceland there was a major banking crisis because all the three major
banks collapsed due to difficulties in refinancing there short-term debt and a run on the
deposits in UK. Iceland’s banking collapse was the largest in the economic history.
In the case of Ireland, the two major banks collapsed resulting in financial crisis.
Ireland was the first country of the Euro zone to officially enter recession. Recently the IMF
declared that Ireland was enduring the worst recession of all the industrialized nations.
Switzerland’s major bank UBS has experienced severe financial crisis. The name of
UBS became synonymous with recession in Western Europe. UBS was asked to reveal
details of a large number of bank account details in relation to tax evasion in USA. Spain was
also one of the major countries which were affected due to financial crisis. The major bank
there faced a lot of problems due to the bust in the property boom. In Belgium, the two major
banks affected by the financial crisis were nationalized. Similarly was the case for Ukraine
where the major bank was nationalized.
The result of the financial crisis was:-
Credit Crunch: Most of the countries in Western Europe were debt users, so the lack of
availability of credit will affect business.
Migration: Due to large unemployment, a large number of migrant workers will return to
their native countries which will result in a significant reorganization and potential challenge
for the host countries.
Consumer Confidence: The customer’s confidence would have to be restored.

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 Housing Sector
The global financial crisis, which started in 2007 with the collapse of the US sub-
prime mortgage, sector affected Western Europe's financial systems through its exposure to
foreign financial assets with high levels of risk. Troubles in the financial sector spread
quickly to other parts of the economy.
Due to the crisis in the financial sector, consumers and businesses are having
difficulties obtaining credit and so demand and investments are softening. In countries with
falling housing markets, difficulties in obtaining credit reinforce the downward trend of
housing prices.
Consumers with high levels of household debt are more exposed to the recession, as
job losses could result in defaulting on mortgages or other loans. Countries which went
through housing bubbles typically have high levels of consumer indebtedness.
Countries with falling housing markets, notably the UK, Ireland and Spain, suffered
more than others.
-The UK is expected to be among the worst hit by the crisis, mainly due to its bursting
housing bubble, high household debt, a large government budget deficit and overdependence.
-Falling property prices are depressing consumer confidence further. Especially Spain and
Ireland are experiencing the end of house price bubbles, which means that consumers face
losing money on their investments. The construction sector is undergoing a sharp downturn,
causing the worst impact in countries such as Ireland or Spain where it accounted for 11.0%
and 13.8% of GDP respectively in 2008.
-Deepest recession in 2009 is expected in Ireland at -5.0%, due to the bursting of a
construction and housing bubble, high levels of consumer and government debt, the country's
close relationship with the USA, and the comparative strength of the euro compared to the
UK pound.
Reasons that affected the housing sector most are:

• Rising unemployment.

• Difficulties in obtaining credit.

• Lower interest rates.

 Automobile Sector
Automotive sector is negatively affected by global recession. Used car sales are
unaffected, but new car sales have fallen dramatically. Because of recession, customer wants
cheaper services to maintain their vehicles, so some independent garages are reported to be
beneficial because of recession.
Vehicle Manufacture: UK is badly affected by recession in production of cars. “Society of
motor manufacturers and traders” has given a figure which demonstrates the continuous fall
(down 55.3%) in the number of car produced.

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 Recession in Western Europe

New Car Market: The new car sales sub-sector continues to experience difficult economic
operating conditions. In May 2009 new car registrations were down by 24.8% compared with
the same month a year previously.
In Western Europe, Germany is a notable exception seeing new car sales rise by
19.4% in April compared with April 2008 and up 18.4% in the year to date. New car
registrations in France and Italy, which had previously seen some increases, fell in April by
7.1% and 7.5% respectively, but by considerably less than in other Western European
countries. All three governments have introduced cash for scrap schemes similar to that
announced by the UK chancellor in April, though the German scheme has currently met with
the greatest success. This success could in part be due to younger cars being eligible in these
schemes.
The main source of growth was the automotive industry, where small and medium-
sized Austrian companies produce parts mostly for German car makers.
BMW and General Motors operate production sites for engines in Austria, and the
Canadian car-part group Magna, has most of its European plants in Styria
Used Car Market: Market is high due to less new purchases. Used cars sales remain same
throughout the first quarter of 2009. Consumers are holding onto their cars for longer so some
business are finding difficult to get specific models.
Vehicle Rental and Leasing: The rental and leasing side has seen some positive outcomes
from the recession. One benefit is that the re-sale value of ex-rental vehicles has increased
meaning more money is coming into the business from this income stream. The leisure side
of the rental market business has increased as people are reportedly renting cars for short
periods of time instead of buying their own vehicles.
Employment and training: The recession is clearly and seriously beginning to affect
apprenticeships. A higher proportion of apprentices are now unemployed than was the case
when they completed their programs.
Workforce levels in the sector are declining. Vauxhall employs some 5500 UK
workers at its two plants. Its parent company is GM which is filing for bankruptcy at US.
Government officials have tried to allay concerns suggesting that the government will
provide support to ensure that the future of Vauxhall is secure.
Job crisis in UK auto industry: This financial crisis would affect job scenario in UK auto
industry. Many employees may be sacked in order to cope up with losses. Nissan is supposed
to sack 1,200 people from its Sunderland outlet. This is first time that a permanent cost
reduction drive of this magnitude is happening in UK after Nissan opened operations in 1986
at this country.

 Manufacturing Sector
The European Manufacturing sector is also likely to face serious challenges through
2009 and 2010. The Western Europe comprises of 15 countries among which there are 12
major industries are likely to decline in 2009, with non metallic industries falling the most by
9.8%. Textiles will decline the most in both years forecasting to fall by 9% in 2009 and by
11% in 2010. Industrial production in the United Kingdom, Spain, Italy, France, Finland and
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Sweden is already declining and these countries will succumb to a serve recession in selected
sectors by end of 2009

 Retail Sector
Even the retail industry is affected by the increasing economic pressures. The
companies will increasingly look to outsource technology and business process to cut costs.
A large number of retailers in Western Europe are suffering as a result of low consumer
confidence; even to the point of bankruptcy. Cutting down the staff and inventory are the 2
biggest costs for a retailer and prioritise to protect their margins. Thus, retailers will expect
outsources to not only know the demands of the retail industry, but also the challenges of the
particular sector.

 Telecommunications/Mobile Sector
Starting with recession western Europe mobile phone market showed 3 consecutive
quarters of negative growth. For the year 2008, vendors shipped 190.5 million units in
Western Europe, 6% lower than 202.5 units shipped in 2007. Fourth quarter was considered
to be worst quarter comprising of factors like weak end-user demand, currency volatility and
limited credit availability. Vendors predicted that if these conditions persist the mobile phone
market may not recover until 2010. To prevent these kind of situations cost reduction and
operational efficiency have become key strategy.

 Government Response and Policies

Most Western European governments have launched stimulus measures, along with
rescue packages for their troubled banking sectors. Public spending across the euro zone rose
0.4% q/q in the second quarter, after increasing 0.7% q/q in the previous stanza. These
policies are now supporting household consumption. Incentives for consumers to scrap old
cars for new models have successfully lifted auto sales in both Germany and France. Private
consumption in the euro zone rose 0.2% q/q, following a drop of 0.5% in the first
quarter. Fiscal stimulus programs in the region's key trading partners have also helped
support the euro zone. Exports contracted at a slower pace of 1.1% q/q in the three months to
June 2009, compared with a drop of 8.8% in the previous quarter.
European policymakers were forced to respond to the financial crisis with new
liquidity facilities, asset purchase schemes, and guarantees for bank debt. The governments in
Spain, Germany, Switzerland and other countries have started to recapitalize banks in order
to prevent a financial meltdown. A coordinated fiscal stimulus of 200 billion Euros was
proposed by the European Central Bank which was to be implemented through national
budgets. The European Central Bank also aggressively cut rates by a total of 325 basis points
since September 2008 to a record-low 1% by May. The bank now is offering commercial
banks unlimited liquidity for up to one year and has started buying covered bonds in a bid to
spur lending.

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 Key Learnings
The noted economist John Maynard Keynes said that government intervention was
necessary in regulating the economy. According to the Keynesian Economics, the market
should be somewhat regulated by the government. This theory was followed in the 1910’s
and continued till 1970’s. However from 1970’s the financial market was deregulated and it
became a private domain.
The resulting financial crisis has once again placed the banking and other financial
instruments in government’s hands. So once again the banking system maybe returning to the
Keynesian economics.
Regarding the life cycle theory countries of the Euro zone region before the recession
were in the stage of maturity. After being affected by the recession the stage of maturity got
converted into decline.
Unemployment rate got a push due to which companies did not emphasise on training.
They were concerned about cost cutting. Manufacturing sector also got badly affected due to
decline in the exports within and outside the countries of Euro zone.
Thus the other variables influencing consumption patterns affected by recession were
wealth, income, consumer’s expectations, interest rate and credit availability.

 References:

www.eurostat.com www.cellular-news.com
www.euromonitor.com www.money.cnn.com
www.marketresearch.net www.allbusiness.com
www.ft.com www.vox.cepr.org
www.reuters.com www.neurope.eu
www.economy.com www.telegraph.co.uk
www.imf.org www.economywatch.com

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