The International Monetary Fund cut its estimates last week for the region's expansion this year to 1.6% from 2%, and in 2012 to 1.1% from 1.7%. That compares with growth of 4% in 2011 and 2012 in the world economy, the organization forecast.
“Damage is done,” J.P. Morgan Chase & Co. Chief Economist Bruce Kasman said Sept. 24 during a panel discussion at the Institute of International Finance annual meeting in Washington. “Europe in our mind is entering recession. Greece is insolvent and the European Union needs to deal with that. It hasn't yet come to terms with that.”
The ESM will have a €500 billion ($670 billion) war chest that would help shield countries such as Italy and Spain from the region's growing debt crisis. It also includes provisions for sharing costs with bondholders for countries with “unsustainable” debt.
Credit-default swaps on sovereign debt of Italy, Spain, Belgium, France and Germany also rose to records on Sept. 23. Contracts on Italy rose 13 to 547, Spain jumped 17 to 450, Belgium climbed 10 basis points to 304, France increased 3.5 to 206, Germany advanced four to 110, CMA prices show.
Faster ESM enactment would provide a “more effective financing structure” that cuts the extra debt of donor countries by 38.5 billion euros, according to the document obtained by Bloomberg News. “This gain is to be considered as a minimum,” it said.
Asked by Bloomberg Television about bringing forward the ESM's start date, EU Economic and Monetary Affairs Commissioner Olli Rehn said the focus for now is on upgrading the temporary fund, the 440 billion-euro European Financial Stability Facility.
Speculating on a weaker euro means betting against the ability of Merkel and Sarkozy to keep the EU together. The two said this month in a joint statement that “it is more than ever indispensable” to “assure the stability of the euro zone.”
IMF Managing Director Christine Lagarde said investors haven't taken into account “very solid fiscal consolidation” in some euro region nations.
“I would hope that analysts would actually look under the skin of budgets of economies, of policies, to appreciate their solidity,” Ms. Lagarde said in a Sept. 22 Bloomberg Television interview.
Germany, Europe's largest economy, benefits from keeping the EU together because 43% of its goods, or about €416 billion, are sold within the region. Exports were 4.9% higher last quarter than three years ago.
“It would complicate trade a lot if the euro zone breaks up, never mind the socio-economic impact,” Ulrich Leuchtmann, Commerzbank AG's head of currency strategy, said in a Sept. 22 telephone interview from Frankfurt. “The euro is the main tool for stronger European integration.”
The euro is the second-most traded currency after the dollar, according to the Bank for International Settlements in Basel, Switzerland. It accounted for 26.6% of global currency reserves as of March 31, up from 18% at its inception, and second only to the greenback's 60.7%.