The European Central Bank cut its economic growth forecast for the Euro zone amid rising fear for the economic health of the continent. This move is a downward revision of earlier forecast by ECB. ECB President Jean-Claude Trichet said at a press conference that “there is a risk that growth will slow to near standstill nest year.”

The downward spiral of the European economy has been so powerful that it has casted clouds over the future prospect of whole Euro zone. A crisis of sovereign debt might develop unprecedented fissure in the union which perhaps may lead Greece to exit the EU. Furthermore there has been growing concerns over the future of the Euro as currency.

On the possibility of the Euro zone sinking back into recession, Trichet said “it is difficult to make forecasts in the current situation.”An unfortunate economic situation in Europe is emerging from fiscal disintegration among nations in the Euro zone, coupled with an overall fragile economy. Even so, authorities could have averted the debt dilemma if the economy would have been functioning well.

The confidence in the 17-nation currency area was further dented when Italy was forced to pay the highest interest rates since joining the EU. “I think there is a possibility, if wrong steps are taken, that the system goes off the rails” said Sergio Marchionne, CEO of Italian car maker FIAT. Markets have already taken interest rates on Italian bonds to much higher levels indicating the risks involved in the vehicle.

Yields on bonds are determined according to market sentiment — if investors feel very edgy and uncertain, interest rates may soar and vice versa, leading to a breeding burden on governments. Five year bond yield hit a Euro lifetime high of 5.60 percent recently. Domenico Lombardi, president of the Oxford institute of Economic Policy said “European policy makers must act fast to ward off a full-blown market attack on Italy.”

On the other hand, Moody’s rating agency downgraded two top French banks over fear of their exposure to Greek sovereign debt. Moody’s cut the rating of Credit Agricole bank, one of biggest of Europe from Aa1 to Aa2 and also downgraded the rating of Societe Generale from Aa2 to Aa3.

Banking industry in the Euro zone is in the circle of gloom for being exposed to various potentially unsafe securities of government bonds. The institute of international finance told that prolonged inability to deal with Europe’s debt issues put its banking system at severe risk.

In his description of the magnitude of severity of economic uncertainty, European commission head Jose Manuel Barroso said “the most serious challenge of a generation. This is a fight… for the economic and political future of Europe.” It all depends on how the financially big countries of Europe behave in a bid to rescue the area — how well they hear the brawl of economically beleaguered nations by designing a suitable rescue package that optimally saves the EU from disintegration in the future.

What is needed is a temporary bail-out and stringent fiscal integration among nations in the future in order to ward-off economic demons.

Image Courtesy of  http://www.flickr.com/photos/worldbank/

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About the author

Muhammed Faraaz
Post-graduate in Economics from India, unfolding complexities and policies. Proponent of Classical Economics.

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