Financial Crisis Watch 13 May 2009

Centre For European Studies
FINANCIAL CRISIS WATCH
Last updated on 13/05/2009 To view full articles click on hyperlinks.

CONTENTS

FOREWORD BY CES HEAD OF RESEARCH

FINANCIAL CRISIS: ACTIONS TAKEN BY EU MEMBER STATES

FINANCIAL CRISIS: ACTIONS TAKEN WORLDWIDE

HIGHLIGHTS

OUR COMPETITORS’ VIEWS ON FINANCIAL CRISIS

UPCOMING EVENTS

ANNEX

www.thinkingeurope.eu


Foreword by CES Head of Research
“Watchtower: Real Evidence”

As the EP election day on June 7 draws closer, and the campaign gathers speed, the European
socialists are intensifying their polemics against the EPP, still hoping that they can somehow profit
from the financial and economic crisis by blaming it on the EPP family and its majority among EU
member state governments and in the European Parliament, as well as on the Commission under
President Barroso.

Beginning with the rather lofty “People First!” election manifesto of December 2008 and, so far,
culminating in the “15 falsehoods” of the EPP enumerated on the PES website of last week, socialist
polemics is intensifying. It is ostentatiously directed against “conservatives”, by which the PES means
the EPP family which is, as we all well know, on the party level composed mainly of Christian
Democrats and centrists. But the semantics of labeling the competitors is only the first element.

On the national level, the PES manifesto claims that “where the left is in power, we can see real
evidence of what socialists and social democrats can achieve.” At closer look, out of the few EU
member states where socialists and social democrats are, or were until very recently, ruling alone or in
a leading role, the left’s track record looks pretty abysmal. Spain under José Luis Zapatero has, with
close to 18 %, Europe’s highest unemployment. In Hungary – with, among many disasters, one of
Europe’s worst credit ratings - the government of Ferenc Gyurcsány has just gone down in flames and
given way to a caretaker government. In Slovenia, the socialist-led coalition under Borut Pahor is
perilously close to falling apart. And Britain’s Labour government led by Gordon Brown is one that
most European socialists would rather not want to be seen with in bright daylight, anyway. So much
for the real evidence.

What’s more, EU-wide opinion polls in the run-up to June 7 are not giving the socialists much hope,
because even in countries with the left in opposition or in government as the junior partner, there is
no “surge” in sight. So far, Europe’s left is simply not profiting from the crisis. There are many reasons
for this, ranging from internal disputes to the lack of a clearcut and generally acceptable political
alternative to centre right economic policies (see the first “Watchtower” commentary from January 12,
2009). One of them, and certainly not the least one, is the real evidence from the countries where the
left is in power.



FINANCIAL CRISIS: ACTIONS TAKEN BY EU MEMBER STATES
Belgium
The proposed sale of the Belgian banking branch of the Fortis financial group to the French company
BNP Paribas received the long awaited approval from the shareholders. Opponents of the sale believe
the company should have retained the banking business because this would have increased the
chance of their shares gaining in value. However, a majority of 73 per cent eventually approved the
sale to BNP Paribas. (03/05/2009)
Fortis shareholders approve banking sale (New Europe)

Bulgaria
Bulgaria's Economy and Energy Minister Petar Dimitrov said that 3 per cent decrease in Bulgaria's
Gross Domestic Product (GDP) is due to the shrinking of the industry. The Minister further stated that
if the harvest and the tourist season end up being good for Bulgaria, the country could avoid recession
and the economy during the second and third quarter could run into positive figures. (09/05/2009)
Bulgaria Economy Minister: Tourism, farming to help avoid crisis (Sofia Novinite)

Cyprus
Cyprus is to launch its largest ever bond issue as it seeks to raise one billion euros (1.4 billion dollars)
to help refinance its debts, Finance Minister Charilaos Stavrakis said on 12 th May. He agreed that the
issue was a "big challenge" because of the unpredictable global economic climate. It will mark the
country's first appearance on the international investment scene for five years. The Minister said that
he and his team will give around 10 presentations in four European financial centres – the first in
London, followed by Paris, Frankfurt and then either Amsterdam or Milan. (12/05/2009)nnnnnnnnnn
Cyprus to launch billion euro bond issue (EUbusiness)

Czech Republic
Leaders of the current social Troika countries (the Czech Republic, Sweden and Spain), the European
Commission and European social partners met in Prague on 7th May to discuss the impact of the
current crisis on employment. “Millions of Europeans are losing their jobs and we must do all we can
to create new jobs in Europe to offer to the unemployed,” said European Council President Mirek
Topolánek. “We must also keep the cost of all these measures in mind because, as I have already said
several times, creating debt is no solution. We agreed that we need to modernise the social security
system, which should work as a kind of trampoline to enable people to get back on the labour market
quickly.” (07/05/2009)
Employment Summit offers solutions to unemployment (EU2009.CZ)



On the backdrop of falling external demand, the Czech economy is expected to be in recession in
2009, with domestic demand, stock building and external balance contributing negatively to economic
growth. GDP is expected to contract by 2.7 per cent in 2009 and to move back into positive territory in
2010. (04/05/2009)
Spring 2009 economic forecast: Czech Republic (European Commission)

Estonia
The government of Estonia announced that it would take out a 6.5 billion kroon (415 million euros)
loan from two European banks. Prime Minister Andrus Ansip said the money would help the country
tackle its deficit in an effort to bring the economy in line with the Maastricht criteria and allow it to
join the eurozone sometime in 2011. “We are planning to bring down the budget deficit to 3 per cent
of Gross Domestic product (GDP).cccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccc
(07/05/2009)mmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmm
Estonia to take multi-billion kroon loan to cut deficit (The Baltic Times)

Recession-hit Estonia plans fresh spending cuts aimed at keeping the 2009 budget deficit below 3.0
per cent of GDP in order to join the eurozone in January 2011, the finance ministry said on 5 May.
Kristi Joesaar, a spokeswoman for Estonia's finance ministry, said additional savings of 2.6 billion
kroons were also planned through freezing state payments to pension funds and increases in
unemployment security tax. (05/05/2009)cccccccccccccccccccccccccccccccccccccccccccccccccccccccccc
Estonia plans fresh fiscal measures to keep on euro track (EUbusiness)

France and Italy
France and Italy both saw sharp falls in industrial output in March, which were much larger than
forecast. French output was down 1.4 per cent in the previous month, said national statistics office
INSEE. Economists had predicted a decline of only 0.5 per cent. Production of electronic goods and
output in the energy and food sectors fell, outweighing a rise in transport. Meanwhile monthly
production in Italy fell for the 11th month in a row, down 4.6 per cent in February's output. Analysts
had expected a monthly drop of 1.6 per cent. (11/05/2009)dddddddddddddddddddddddddddddddd
French and Italian output drops (BBC)

Germany
Germany’s generous welfare system could collapse as early as this year because of the economic crisis
and misguided confidence-boosting measures by the government, experts have warned. The warning
was made after Angela Merkel’s cabinet adopted a permanent ban on pension cuts, shielding 20m
pensioners who might have faced old-age benefit cuts next year, from the effect of the economic
crisis. (08/05/2009)
Threat to German welfare system (Financial Times)



The European Commission announced on 7th May that it has approved a capital injection of €18 billion
for Commerzbank. The Commission agreed to authorise the aid in exchange for commitments from
the bank to sell off subsidiaries and refrain from merger activity. Both the German government and
Commerzbank have said that the aid is needed to shore up the bank's finances. Peer Steinbrück,
Germany's finance minister, criticised the Commission for taking too long to approve the aid.
(07/05/2009)ddddddddddddddddddddddddddddddddddddddddddddddddddddddddddddddddd
Commission approves €18bn in aid for Commerzbank (EuropeanVoice)

Fiat’s plan to build a European car group with Chrysler and GM’s German unit, Opel, began to hit
obstacles as Berlin issued a string of conditions for any Opel buyer, and dissident Chrysler creditors
said a sale to Fiat would be “patently illegal”. The moves came as Sergio Marchionne, Fiat’s chief
executive, met government and union officials in Berlin in the first round of his campaign to secure
political backing by the end of this month for a car group with up to 7m in annual sales and combined
revenues of €80bn ($107bn). (05/05/2009)
Fiat setback in plans for European group (Financial Times)

Greece
Whether or not Greece succeeds in avoiding its first economic recession since 1993 depends largely on
the survival of tens of thousands of small and very small companies, where, according to bankers and
other experts, a domino effect of bankruptcy is a real possibility over the next four or five months. The
financial health of these small firms is very important for the Greek economy, unlike in other eurozone
countries where large firms account for the bulk of employment. There are some 800,000 companies
in Greece of which more than 790,000 are small or very small in size, about 6,000 are middle-sized
businesses and some 400 large ones. (11/05/2009)
Small and very small firms are vital to any economic recovery (Kathimerini)

Greece’s Minister of Economy and Finance Yiannis Papathanasiou was in Brussels to attend meetings
and seminars of his peers and financial analysts and economists to explain how their countries are
handling the recession and find ways out of it. Disputing the assertion of one moderator that Greece is
suffering from social disharmony because of its economic state, he said Greece’s banks were not as
hard hit as others in the EU by the US-started sub-prime mortgage crisis. Greece’s deficit is at 5 per
cent of GDP, well above the 3 per cent ceiling set by the European Union, but he said the country is
coming out of the worst phase and will recover. (11/05/2009)
Solving the EU’s recession isn’t easy (New Europe)



Ireland
Small firms in Ireland are waiting longer to be paid by public bodies and larger corporations, according
to the Irish Small and Medium Enterprises Association (ISME). ISME Chief Executive Mark Fielding said
access to credit and the exchange rate between the euro and the British pound are driving companies
out of business. He said the problem with late payments is now worse than ever, with SMEs in Ireland
waiting an average of 69 days for payment. (11/05/2009)
Irish SMEs 'crippled' by late payments and exchange rate (EurActiv)

Latvia
Latvia's GDP officially dropped 18 per cent in the first quarter of 2009, according to the Central
Statistics Bureau. In the first quarter of 2009, the production and services sectors continued to see a
downturn. Manufacturing volumes fell by 22 per cent, retail by 25 per cent. Hotels and restaurant
services dropped by 34 per cent. Budget revenue also continued to decrease in the first quarter.
(11/05/2009)
Latvian GDP drops 18 per cent (The Baltic Times)

Lithuania
Lithuanian banks posted combined net losses in the first quarter of this year of 20.1 million litas (5.83
million euros), the country’s Central Bank reported. The report followed news that the country is
suffering from the worst recession in the European Union. In the first quarter of 2008, the net income
of the banks was 337.2 million litas, the Central Bank said. Seven of Lithuania’s 16 banks reported a
loss. (07/05/2009)
Lithuanian banks hit hard (The Baltic Times)

Romania
Romania, on course to receive nearly 24 billion dollars in IMF and EU loans to battle an economic
slump, is likely to see inflation of 4.4 per cent this year, the central bank said on 7th May. This will be
brought down to 3.5 per cent in 2010, the central bank added. (07/05/2009)
Romania set for 4.4 per cent inflation this year (EUBusiness)

Spain
The European Central Bank took investors by surprise with plans that could help stabilise house prices
in Spain and Ireland. In an initiative to stimulate the flagging eurozone economy, the central bank
pledged to shore up one of the markets most savaged by the credit crisis by buying about €60bn
(£53.5bn) in eurozone covered bonds, securities that usually attract triple-A ratings. (08/09/2009)
ECB covered bond plan raises hopes for house prices (Financial Times)



The rise of Spanish unemployment slowed markedly in April and consumer confidence increased for
the second month running to return to the level of a year ago. Registered unemployment rose by
39,478 people or 1.1 per cent – a third of the rise in the previous month – to reach 3.64m, the Labour
Ministry announced. Government ministers claimed credit for the development, saying that fiscal
stimulus spending had started to have an impact on the labour market, although critics said thousands
of new jobs created by local authorities to repair infrastructure were temporary and of questionable
value. (05/05/2009)
Growth in Spanish unemployment slows (Financial Times)

UnitedcKingdom
Britain’s recession will be shorter and shallower than that in much of the rest of Europe, the European
Commission forecast. But it warned that the country’s public finances would be among the worst in
the 27-nation bloc. Revising down growth prospects across Europe, the Commission reversed its
January prediction that Britain would sit low down the EU economic league table. It now expects the
UK economy to contract by 3.8 per cent this year, before growing by 0.1 per cent in 2010.
(04/05/2009)
Brussels sees UK economy contracting 3 per cent (Financial Times)

FINANCIAL CRISIS: ACTIONS TAKEN WORLDWIDE

China
China's consumer prices fell by 1.5 per cent in the year to April, figures show, the third consecutive
month of decline. The drop came after food and energy prices eased from last year's high levels, and
followed annual falls of 1.2 per cent in March and 1.6 per cent in February. Food prices were down 1.3
per cent in April from a year ago. (11/05/2009)
Prices in China continue to fall (BBC)

China's exporters are returning home to sell their products as global economic gloom takes a toll on
their overseas orders. Despite a track record in manufacturing products to global standards for leading
brands, many are finding it tough to tap into China's domestic market due to fierce and unfair
competition, lack of local brand names and poor domestic distribution networks. (04/05/2009)
China exporters, hit by slump, see potential at home (Reuters)



Japan
American International Group Inc is near a deal to sell its Japanese headquarters for about $1 billion in
what would be one of its largest asset sales since a September rescue. A Japanese insurance company
is expected to buy the prized building in the Otemachi section of Tokyo, although at least two parties
were looking at the property. (04/05/2009)
AIG nears Japan building sale for $1 billion (Reuters)

Japan will establish a scheme to supply up to about 6 trillion yen ($61.54 billion) to Asian nations in the
event of a financial crisis, Finance Minister Kaoru Yosano said. The yen swap plan will be in addition to
Japan's $38.4 billion contribution to a $120 billion regional liquidity fund. Both measures are aimed at
supporting the region's economies in a crisis, Yosano told reporters on the sidelines of the Asian
Development Bank's annual meeting in Indonesia. (03/05/2009)mmmmmmmmmmmmmmmmmmm
Japan to set up additional $61.5 billion scheme for Asia (Reuters)

UnitedcStatesc
US retail sales fell in April, dashing recent hopes that consumer spending might finally be stabilising as
the population continues to curb its purchases. Sales declined by 0.4 per cent in April against the
previous month and were off by 10.1 per cent on the year, commerce department figures showed on
Wednesday. The results disappointed analysts, who expected them to remain flat, and were down due
to falling sales of electronics, appliances and petrol. (12/05/2009)
US retail sales 0.4 per cent fall in April (Financial Times)

American International Group Inc is expected to post a first-quarter loss, but the embattled insurer's
results will not trigger a new capital injection from the U.S. government. The loss in the first quarter is
expected to be significantly lower than its record fourth-quarter loss of $61.7 billion, the source said,
adding that there would be no new bailout announced with the results. (05/05/2009)
AIG to post first-quarter loss, no new bailout (Reuters)

U.S. automaker Chrysler LLC won interim court approval to access a $4.5 billion bankruptcy loan from
the U.S. and Canadian governments, pushing it further along toward its planned sale to Italy's Fiat SPA.
(05/05/2009)
Chrysler gets court OK on loan, seeks Fiat sale (Reuters)

Citigroup Inc may need to generate up to $10 billion in new capital to meet the requirements of the
U.S. government's stress tests. Citigroup may need less if regulators accept its arguments about its
financial health. In a best-case scenario, Citigroup could have a roughly $500 million cushion above
what the government requires, the paper reported. (01/05/2009)ccccccccccccccccccccccccccccccccccc
Citigroup said to need up to $10 billion (Reuters)



HIGHLIGHTS
On 7th May, the European Central Bank cut its principal interest rate by 25 basis points to 1per cent.
The ECB decided to cut the interest rate on its marginal lending facility by 50 basis points to 1.75 per
cent and to keep the interest rate on its deposit facility unchanged at 0.25 per cent. Jean-Claude
Trichet, the ECB's president, said that the decision to reduce rates was taken in the light of data
showing that the eurozone's first quarter performance was “much weaker than expected”. He said the
ECB had not excluded further rate cuts. (07/05/2009)ssssssssssscccccccccccccccccccccccccccsssssssssss
ECB cuts interest rate to 1 per cent (EuropeanVoice)

On 6th May, MEPs agreed new rules on capital requirements for banks, intended to help prevent a
repeat of the financial market crisis. As a result of the vote at the plenary session in Strasbourg,
financial institutions issuing securitised investments such as packaged mortgage loans will have to
retain at least 5 per cent of the value on their own balance sheet. The European Parliament insisted
that this minimum rate could be increased at end of year. The rules have already been agreed with the
Council of Ministers and will come into force by October 2010. (06/05/2009)ccccccccccccccccccccccccc
Capital requirements tightened up by Parliament (EuropeanVoice)

The ECOFIN meeting on 5th May was attended by Commissioner Joaquín Almunia, Internal Market
and Services Commissioner Charlie McCreevy and Taxation and Customs Union Commissioner Laszlo
Kovacs. The Council approved an increase to € 50 billion of the lending ceiling for the EU support
facility for non-euro area Member States in financial difficulty. Among other points, Ministers also
discussed the quality of public finances in relation to age-related expenditures projections and the
economic situation and financial market developments on the basis of the spring forecasts.
(05/05/2009)
Council conclusionsxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
ECOFIN Meeting (European Commission)

Europe's economy will not start recovering until the second half of next year, the European
Commission said on 4th May, cutting forecasts made little more than three months ago, in view of the
depth of the recession. Despite what it called positive signals, the EU executive said the Eurozone’s
economy would shrink by 4.0 per cent this year and 0.1 per cent next year, with its overall public
deficit tripling by 2010 to 6.5 per cent of GDP. (05/05/2009),,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,
No recovery before mid-2010, EU says (EurActiv)



The first quarter of 2009 saw announced job losses outnumber job creation by almost three to one,
according to the European Restructuring Monitor (ERM). The financial sector, auto industry and retail
sector were worst hit by the losses, with new employment recorded in discount stores and fast food
outlets. 220,000 job losses were recorded by the ERM – the highest since it began to collect statistics
in 2002 – with just 90,000 jobs created. (04/05/2009)............dddddddddddddddddddddd.....................
Layoffs dwarf job creation across Europe (EurActiv)

The latest official economic forecast predicts the EU economy will shrink by 4 per cent in 2009 – after
growing by 0.8 per cent in 2008. Almost all EU countries have been severely hit by the financial crisis,
the sharp global downturn and, in some economies, ongoing housing market corrections. However, as
fiscal and monetary measures to stimulate the economy take effect, growth is expected to resume
before the end of next year (despite an overall growth forecast of -0.1 per cent for 2010). The figures –
essentially the same for the euro area and the EU as a whole – are down compared with the autumn
forecast and January 2009 interim forecast. (04/05/2009)vvvvvv vvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvv
Falling EU economy set to stabilise as measures take effect (European Commission)

The European Commission on 29 April proposed a bigger budget for 2010 to lift the bloc's
economy out of recession. The Commission's draft budget set spending at 122.3 billion euros ($161.4
billion), compared with 116.7 billion euros planned for 2009. Programmes linked to research and
energy would see the biggest funding increase, at 12 per cent. (30/04/2009)dddddddddddddddddddd
EU budget 2010 counts on innovation for recovery (EurActiv)

OUR COMPETITORS’ VIEWS ON FINANCIAL CRISIS
PSE
From 1st May, the European Globalisation Adjustment Fund, which has an annual budget worth 500
million euros, can be used to help people who have lost their jobs in the wake of the economic and
financial recession. “Europe is making a telling contribution to the mobilisation of millions of workers
and trade unions in honour of Labour Day with the launch of the revamped European Globalisation
Adjustment Fund,” said a happy spokesperson for the Socialist Group in the European Parliament on
social policy, the British MEP Stephen Hughes. (30/04/2009)
Europe’s globalisation fund: helping victims of the economic crisis (PSE News)

The European Commission’s proposals aimed at regulating the activities of hedge funds and
investment funds are inadequate and come far too late in the day, reckon Socialist MEPs.
(29/04/2009)
Hedge funds: “Commission lacking in ambition” say Socialists (PSE News)



Socialists approve a doubling of balance of payments assistance to 50 billion euros. Pervenche Berès,
chair of the economic and monetary affairs committee, which had prepared Parliament’s position,
issued the following statement after the vote: “This is a practical expression of vital European
solidarity with countries outside the euro area that are suffering the full effects of the economic and
financial crisis.” (24/04/2009)
Socialists approve doubling of balance of payments assistance to 50 billion euros (PSE News)

For a Europe of social progress: This short paper, drafted by the PES Group of the European
Parliament, sets out some practical steps needed to put Europe on a new and better path, towards a
New Social Europe, as an essential part of the PES Group's and PES' claims based on the PES Manifesto
2009 "People First - A New Direction for Europe". (24/04/2009)
For a Europe of Social Progress (PSE News)

ALDE
Strongly condemning the European Commission's lack of a clear strategy to fight the financial and
economic crisis, former Belgian Prime Minister Guy Verhofstadt, a Liberal candidate for the EU
elections, presented a manifesto-like book on how to rescue Europe from its worst economic
downturn since the Great Depression. "I have written the book out of anger, because I have seen no
clear strategy in Europe to fight the crisis," said Verhofstadt, presenting his book, entitled 'Emerging
from the crisis: How Europe can save the world'. (13/05/2009)
Verhofstadt slams Commission's economic recovery plan (EurActiv)

The economic crisis requires a strong European response adapted to the diverse situations within
Member States and the varying employment conditions concerned. With this in mind Jean-Marie
Beaupuy (MoDem, France), a co-shadow rapporteur for ALDE, praised the creation of the European
globalisation adjustment fund, the project taken by the Barroso Commission during its mandate in the
social domain. “With €500 million available, this fund could help thousands of Europeans victims of
the present crisis. This act of solidarity, supported by the European Union, is a strong signal on the eve
of the European elections on 7th June," he said. (05/05/2009)hhhhhhhhhhhhhhhhhhhhhhhhhhhhhhd
European globalisation adjustment fund: a strong signal for an active social policy (ALDE News)



UPCOMING EVENTS
Event: Brussels Economic Forumcccccccccccccccccccccccccccccccccccccccccccccccccccccccccccc
Date: 14 – 15 May 2009, Brussels

Event: ECOFIN Meeting cccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccc
Date: 9 June 2009, Luxembourgcvcccccccccccccccccccccccccccccccccccccccccccccccccccccc

Editor: Roland Freudensteinffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffff
Research Assistance: Katarína Králikovácccccccccccccccccccccccccccccccccccccccccccccccccccccccccccc
Design: José Luis Fontalbaccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccc
Questions and comments: briefs@thinkingeurope.eu



ANNEX: SPRING 2009 ECONOMIC FORECAST

Austria
The recession in Austria is projected to deepen in the first half of 2009. The trade surplus is expected
to shrink substantially and investment plans are likely to be curtailed. Industrial production is expected
to shrink markedly as business climate indicators and capacity utilisation have fallen sharply. As a
consequence, private investment in equipment is forecast to fall by 18 per cent in 2009 and to
stagnate in 2010. Due to several fiscal measures, the projected decline is less severe for investment in
construction.

Belgium
In 2009, the deficit is forecast to widen to 4.5per cent of GDP, compared to the government's target of
3.4 per cent of GDP. The difference is largely explained by the more negative macroeconomic scenario
in this forecast. In 2010, under the usual no-policy-change scenario, the deficit is projected to reach
around 6 per cent of GDP, mainly due to the still negative economic environment, including a further
decline in tax-rich items such as private consumption and employment.

Bulgaria
Since the beginning of 2009, economic sentiment and confidence indicators have deteriorated further,
in line with the unfolding global economic crisis. This, together with falling industrial production and
retail sales, points to a sharp slowdown ahead. Driven by weaker external demand and subdued credit
growth, exports and domestic demand are expected to deteriorate significantly. For the first time
since 1997, real GDP is projected to contract by around 1½ per cent in 2009 and to stagnate in 2010.

Cyprus
In view of the ongoing global crisis, economic growth is expected to slow significantly in 2009 but still
remain in positive territory. Domestic demand should continue to drive growth. In the face of a rising
household debt burden and tight financial conditions in an uncertain environment, private
consumption growth is projected to moderate. Economic activity is projected to recover only mildly in
the second half of 2010, due to a less negative contribution from the external sector.

CzechcRepubliccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccc
On the backdrop of falling external demand, the Czech economy is expected to be in recession in
2009, with domestic demand, stock building and external balance contributing negatively to economic
growth. GDP is expected to contract by 2.7 per cent in 2009 and to move back into positive territory in
2010.



The most significant economic drag stems from dismal export prospects, with order volumes falling at
an extremely rapid rate. Exports, which in 2008 remained relatively stable despite a loss in
competitiveness, are expected to fall by more than 10 per cent in 2009. Rising unemployment should
result in a negative wage drift in 2009 and lead to more modest agreements for 2010.

Denmark
The outlook over the forecast period is one of a deepening recession that goes well beyond a mere
correction of the previous overheating. The most significant economic drag stems from dismal export
prospects, with order volumes falling at an extremely rapid rate. Exports, which in 2008 remained
relatively stable despite a loss in competitiveness, are expected to fall by more than 10 per cent in
2009. The government already passed sizeable expansionary measures in its 2009 budget bill. Much of
this stimulus started to have an impact in the first half of this year. These measures entail a significant
increase in real disposable income in spite of a stagnating aggregate gross wage bill.

Estonia
The economy is expected to contract considerably in 2009, by around 10 per cent, and slightly further
in 2010. Most confidence indicators remain at historically low levels, pointing to weak external and
domestic demand, low capacity utilisation and pessimistic expectations. While private sector
investments are expected to decline by around a quarter in 2009 and remain at low levels in 2010, a
positive impact will come from the public sector investments.

Finland
Benefiting from a strong economic upswing over the previous years, Finland built up a significant
public sector surplus, reaching 4.2 per cent of GDP in 2008. While a large share of this reflects the
accumulation of pension fund assets, the central government also recorded a notable surplus. This
provided the government margin for a substantial fiscal stimulus of over 1½ per cent of GDP in 2009
and about 1 per cent in 2010. Together with the operation of the automatic stabilisers, the current
fiscal surplus is forecast to turn rapidly into a deficit of nearly 3 per cent of GDP by 2010. General
government debt is projected to increase from over 33 per cent of GDP in 2008 to about 46 per cent of
GDP by 2010.

France
Despite modest GDP growth, employment continued to expand in 2008, by around 1 per cent, due to
dynamic job creation in the first half of 2008. In 2009 and 2010, employment prospects will reflect the
weakness of economic activity in general. Specifically, the job shedding is expected to gain momentum
as a result of the contraction of global activity and then gradually stop in the course of 2010, reflecting
the traditional lag between growth and employment. Total employment will fall by around 2 per cent
in 2009 and 1 per cent in 2010.


Germany
The extent of the collapse in external demand in 2008 caught many firms by surprise. Despite
considerable cuts in production, there was substantial involuntary stock-building in the second half of
the year. In response to the economic crisis and in the context of the European Economic Recovery
Plan, the German government adopted two stimulus packages consisting of both revenue and
expenditure measures. Even though these measures will not be sufficient to prevent a contraction in
2009, they will help soften the downturn in the course of the year and into 2010.

Greece
Activity is expected to be further affected by the ongoing economic crisis and prevailing uncertainty.
Although remaining above the euro area average, economic growth will turn negative in 2009 for the
first time since 1993. Public and corporate investment growth is expected to benefit from EU
structural funds inflows and the launch of public-private partnership investment projects, thus
avoiding a further strong contraction in 2009 and 2010. Overall, domestic demand is projected to
make a negative contribution to GDP growth in 2009.

Hungary
After declining for two and a half years, real disposable income of households is foreseen to decrease
further by more than 4 per cent in 2009 and is not likely to recover even in 2010. Moreover, since
November 2008, households’ access to credits has narrowed considerably, thereby putting additional
pressure on consumers’ budgets. Consumption is therefore expected to fall by 6½ per cent in 2009
and to decrease somewhat in 2010. The sharp downturn in production, due to weak external and
domestic demand and aggravated by the reduced functioning of the financial markets, is expected to
have an adverse effect on investments.

Ireland
Ireland is facing a protracted and deep recession, with GDP projected to contract further, by around 9
per cent in 2009 and 2½ per cent in 2010. Domestic demand should continue to be the main driver of
the recessionary developments. In particular, an even stronger fall than in 2008 is projected for all
investment components in 2009, with annual housing output almost halving. A further, albeit less
pronounced, reduction in investment is expected in 2010 as market confidence stabilises. At the same
time, despite the projected decrease in the price level, private consumption should fall significantly
and continue to decline in 2010, in the face of reduced disposable income and higher savings devoted
to improving balance sheets.

Italy
The outlook for the first half of 2009 is strongly unfavourable. Short-term indicators point to a
protracted retrenchment of economic activity. In particular, industrial output contracted sharply in the
first two months and is expected to have fallen again in March. In 2010, economic activity is projected
to stabilize at a low level. This is due to both domestic and external demand. On the domestic side,


private consumption is projected to return to mildly positive growth, while investment should take
longer to recover.

Latvia
Recent business and consumer survey results point to a further deepening of the recession. House
prices – already back to early 2005 levels - continue their downward movement at an accelerating
pace. In 2009, investment is projected to fall sharply, as in addition to depressed domestic conditions
the tradable sector is suffering cost competitiveness problems and lack of demand. Public investment
will provide some cushion, taken into account that EU funded projects are safeguarded in the current
budget. Recovery of private investment is projected to start only from end-2010, on the basis of
external demand. Overall, the economy is facing a very severe downturn, with GDP projected to fall by
around 13 per cent in 2009 and 3 per cent in 2010.

Lithuania
The economic downturn in Lithuania will be deeper and more protracted than previously assumed,
mainly due to the worse external environment. Economic activity is expected to shrink by around 11%
in 2009 and to a more modest degree in 2010. The economic downturn is likely to be accompanied by
a sharp rise in unemployment – to nearly 14 per cent in 2009 and even further in 2010 – and a
substantial reduction in employment.

Luxembourg
The recession is taking its toll on the Luxembourgish economy and primarily on its manufacturing
industry, which exports almost its whole production. The Luxembourgish economy might begin to
recuperate around the end of 2009 following the expected timid recovery in the world economy.
However, with the exception of public expenditure, which is projected to remain extremely dynamic,
most demand components will only post very modest positive growth rates and real GDP is likely to
grow only marginally in yearly average in 2010.

Malta
The worsening economic activity in Malta's main trading partners is expected to decrease exports over
the forecast horizon. Declining industrial order books in the first few months of 2009 suggest that
foreign sales of goods, dominated by semiconductors, will continue to shrink. For tourism, a reversal
of the gains recorded in the past years is anticipated on the backdrop of sluggish demand, in
particular from the UK and Germany, Malta’s leading tourist markets. The contraction in exports is
projected to decline in 2010 in line with the assumed gradual international economic turnaround.
Consistent with the slowdown in both private consumption and import-intensive exports, imports are
forecast to contract in 2009, before recovering in 2010.

Netherlands
Economic growth prospects have again turned significantly less favourable, as the international
economic slowdown is expected to be even more pronounced. The fall in annual GDP is now projected


to come out at 3.5 per cent in 2009. For 2010, the economy is forecast to contract by 0.4 per cent. As
this figure includes a somewhat larger carry-over effect from 2009, mildly positive growth dynamics in
2010 are implicit in the forecast. These positive dynamics are expected to come mainly from the
external balance. Domestic demand in 2010, however, is expected to contribute negatively to growth,
as consumption and investment are likely to suffer from a decrease in disposable income and the low
capacity utilisation rate respectively.

Poland
In the course of 2008, an impressive improvement was seen in the labour market, continuing the
trend seen since 2006, as the average annual unemployment rate fell to 7 per cent from 9½ per cent in
2007. As economic activity is expected to weaken, employment should fall by 2¼ per cent in 2009 and
a further 1½ per cent in 2010, while a return of emigrants, less generous early retirement rules and a
reduction of taxes on labour should increase the activity rate. The number of unemployed is projected
to reach some 1.7 million in 2009 – close to 10 per cent of the labour force – and to increase in 2010
by about ½ a million, leaving the unemployment rate at around 12 per cent.

Portugal
Against the backdrop of the financial crisis and a marked recession in trading partners, GDP is
expected to fall by 3¾ per cent in 2009. These adverse shocks are projected to have lasting effects,
with activity forecast to contract further, by ¾ per cent in 2010. Lower levels of activity will translate
into lower levels of employment and the unemployment rate could reach some 10 per cent in 2010.
Wage moderation is expected to follow these developments.

Romania
In view of the large domestic and external imbalances and the adverse effect of the global financial
turmoil on the economic and financial situation in Romania, the authorities made a request to the
European Commission for balance of payments support in March 2009. The financial assistance that
the EU intends to provide will be conditional on the implementation of a comprehensive economic
policy programme, encompassing fiscal, financial sector and structural reform measures.GDP growth is
projected to turn negative in 2009 to around -4 per cent. The anticipated strong contraction of gross
fixed capital formation will be cushioned by an increase in public investment, as EU funded investment
is safeguarded in the current budget. GDP growth is expected to remain around zero in 2010.

Slovakia
After several years of sustained expansion in economic activity, GDP growth is expected to contract by
around 2½ per cent in 2009 and to slightly rebound, by some ¾ per cent, in 2010. On the external
front, the downward trend in exports observed since mid-2008 will continue in 2009, when exports
are projected to fall by some 10 per cent before increasing again by a meagre ¼ per cent in 2010.
Foreign trade developments coupled with an increase in the deficit of the income balance are
anticipated to induce a widening of the current account deficit in 2009. A slight improvement is
expected in 2010, on the back of a decreasing trade and services balance deficit.


Slovenia
As a highly open economy, Slovenia is expected to suffer significantly from the deepening global
recession. Real GDP is projected to contract by 3.4 per cent in 2009, followed by positive growth in
2010. Exports are projected to gradually improve in 2010 in line with the assumed international
economic turnaround. Private consumption should return to positive, albeit low, growth reflecting a
lower pace of job losses and a slight acceleration in wage growth. Government spending should
continue to support economic activity. Investment should gradually benefit from these developments,
but is expected to post a slightly negative growth rate for the year as a whole also on account of a
strong negative carry-over from 2009.

Spain
GDP is projected to decrease sharply by 3¼ per cent in 2009, on the back of strongly contracting
private consumption and investment. GDP is projected to continue contracting in 2010, by around 1
per cent. Construction and equipment investment are forecast to decline substantially, as the
adjustments in these sectors will not yet be completed. Private consumption is expected to fall by
around 3¼ per cent in 2009, despite the expected job impact of the fiscal stimulus and lower interest
rates. In line with economic activity, job losses are set to increase significantly in 2009 and, to a lesser
extent, in 2010. Employment is expected to fall by more than 5 per cent in 2009 and 2¾ per cent in
2010.

Sweden
The outlook for the forecast period is one of continued contraction in the first three quarters of 2009
followed by a muted and fragile recovery as from the fourth quarter. Activity indicators point to a very
weak start of the year, with industrial production and exports continuing to fall sharply. Government
consumption should act as a stabiliser. However, rapidly worsening employment prospects and the
need for households to rebuild their assets after sharp falls in the stock market are likely to put a
dampener on private consumption growth over the forecast period. A combination of the bottoming
out of the global downturn towards the end of 2009 and a significantly weaker Swedish krona should
make a muted export-led recovery possible in 2010.

United Kingdom
The UK's economic prospects are dimmed by continued restrictive credit conditions, global demand
weakness, asset price falls and subdued confidence levels amongst households and businesses. The
central outlook expects quarterly growth to remain negative for the first three quarters of 2009 due to
a pronounced fall in domestic demand, followed by two quarters of virtual stagnation and only a
gradual return to slight positive growth by late 2010.

Norway
Norway is relatively resilient to the weaker global demand through its large oil sector and its direct
impact on the local economy via strong public consumption growth. The financial crisis will manifest
itself chiefly by capital being harder to come by and more expensive. Unemployment reached its
lowest level in 20 years in 2008, despite high labour force growth. However, it is now forecast to
increase considerably in the next two years. Inflation peaked in 2008 at close to 4%, but is expected to
decrease to just above 1 per cent during the forecast years.



Switzerland
Switzerland's four-year economic upturn ended in 2007. Foreign demand, which initially drove the
upswing, will now become a major contributor to the contraction, along with shrinking domestic
demand. The global slowdown will turn GDP growth in Switzerland negative: to -3.2 per cent in 2009
and -0.5 per cent in 2010. Foreign demand for Swiss goods and services will contract in 2009 and
though demand for goods will rebound slightly in 2010, it will remain negative overall.

Iceland
After a period of high growth rates supported by large investment projects and strong domestic
demand, which have generated significant imbalances, Iceland is now facing the consequences of the
currency crash of 2008 and the ensuing economic crisis. Domestic demand declined sharply, Incomes
are under pressure and unemployment is set to increase significantly this year in all sectors,
particularly the banking sector. GDP should return to growth in 2010 though there are significant,
mostly currency related, risks to the forecast.

Croatia
The global financial crisis is increasingly taking its toll on the Croatian economy. The marked
deterioration of the external environment, including a projected growth slowdown in Croatia's major
EU trading partners, will have a heavy impact on the Croatian economy. External financing constraints
have become tighter and spreads have increased. Higher domestic borrowing costs and a decline in
confidence levels will lead to a considerable reduction in private investment activity. Moreover, it
cannot be excluded that cross-border lending, currently an important financing source of the
corporate sector, will be adversely affected by the global financial crisis. Public investment is likely to
slow. These effects will lead to a rapid contraction of total investments. In addition, private
consumption growth is projected to fall in 2009. Public spending plans are likely to be revised
downwards in the context of a budget revision, as revenue growth is sharply decelerating. The
forecast predicts a reduction of real GDP in 2009 with significant downside risks.

FYRoM
In the last quarter of 2008 and in early 2009, the economy started to experience the indirect effects of
the global slowdown, leading to a sharp drop of exports, capital inflows and investment. However,
private and public consumption should support a domestically driven growth momentum. Overall,
output is likely to drop by about ¼ per cent in 2009. This is nearly 5 percentage points lower than
expected in the autumn forecast. The probably more favourable economic conditions towards the end
of the forecasting horizon should lead to output growth by about 1½ per cent in 2010.

Turkey
In 2009, the economy is likely to be subject to similar synchronised shocks – export contraction,
sharply reduced domestic demand and external financing constraints. Most recent data on exports,
industrial production, capacity utilisation, bank lending and imports of capital goods all point to a deep
contraction in 2009. The economy is expected to shrink by around 3¾ per cent in real terms, but unlike
previous recessionary episodes, it would not be triggered by a banking/financial crisis. The relative


soundness of the banking system and the end of the inventory adjustment should lead to a 2¼ per
cent rise in real GDP in 2010.

China
China is in a better position to counter the negative consequences of the turmoil in the international
economy than most other emerging markets, inter alia because the arsenal of policy instruments
available is wider and deeper. In the run-up to the G-20 summit in November last year, the Chinese
leadership announced a huge fiscal stimulus package amounting to RMB 4 trillion or around 13 per
cent of (2008) GDP. Given the very low debt level (18 per cent of GDP) China does have considerable
margin for fiscal policies. Given the focus of the stimulus package on infrastructure and construction
projects, imports of commodities are likely to recover further in real terms in the course of 2009.

Japan
The global financial crisis is now severely affecting the Japanese economy. External trade is still
collapsing, corporate profits are being, eroded, confidence is low, financial market conditions are
deteriorating and a negative feed-back loop from real-economy weakness to the financial sector has
set in. In 2010, the gradual impact of policy measures implemented globally should also support
Japanese exports, which, in turn, should contribute to the resumption of manufacturing activity. All in
all, GDP is forecast to contract by 6.1 per cent in 2009 and 0.8 per cent next year.

Russia
Following the global economic downturn, Russia’s growth is expected to be negative in 2009 (-3.8 per
cent) and moderately positive in 2010 (1.5 per cent). Inflation should remain at double-digit levels,
decelerating slightly from almost 14 per cent to around 10 per cent, as the fall in economic activity and
the reduction in commodity prices cushion the inflationary effects of the rouble devaluation. The
budget is expected to swing sharply from a hefty surplus to large deficits, of respectively 6.5 per cent
and 2.7 per cent of GDP, due to the reduction in commodity prices and in economic activity, plus the
large fiscal stimulus packages. Russia is also forecast to see a significant fall in both its trade and
current account surpluses in 2009 and 2010, to, respectively, 5.1 per cent and 6.3 per cent, and 1.4 per
cent and 2.7 per cent of GDP.

USA
The economy is facing formidable headwinds over the forecast period. The labour market is
weakening rapidly with payroll employment having contracted at an annual rate of 6 per cent over the
winter and no sign of deceleration yet. Job losses will feed into declining incomes and consumption
back into further redundancies. The downturn in trade and fixed investment has continued unabated
in the first quarter of 2009. It has been exacerbated by an acceleration of the destocking process. On
the other hand, consumer spending has stabilised following a boost to disposable personal income in
January from some one-off factors. But this is unlikely to have been sufficient to prevent another
significant contraction of real GDP.

<<Source: European Commission >>


Financial Crisis Watch 13 May 2009

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Financial Crisis Watch 13 May 2009