The European Union may see a wave of bankruptcies this year as frozen credit paralyses firms, Europe's top business group warned today, forecasting a sharp economic contraction and high unemployment.
In its twice-yearly economic forecast, BusinessEurope, formerly UNICE (the Union of Industrial and Employers’ Confederations of Europe), said the 16-nation euro zone's economy would contract by 2.1 per cent in 2009, compared with 0.8 per cent growth last year. For the 27-nation EU, negative growth is expected at 2.2 per cent.
The forecast was more pessimistic than that presented by the European Commission, the EU's executive arm, in January, which predicted a 1.9 per cent contraction in the euro zone.
BusinessEurope said the European Central Bank (ECB) could help overcome the impact of the global financial crisis by cutting interest rates further and buying commercial paper from companies choked by a lack of credit.
"There is in particular the concern that the recession will deepen financial sector losses, leading to a downward spiral of falling asset prices, new credit restrictions and a wave of corporate bankruptcies," BusinessEurope said.
The group, which speaks for some 20 million European companies, forecast the euro area's jobless rate would jump to 9.5 per cent this year from 7.5 per cent in 2008.
"Job losses are expected to reach 4.5 million this year in the EU-27, with Spain and the United Kingdom alone accounting for almost 2 million," it said.
Euro zone inflation is expected to fall sharply in 2009, thanks to lower energy prices and falling consumer demand. It is seen at 0.8 per cent versus last year's 3.2 percent, allowing the ECB to lower interest rates further.
"BusinessEurope urges the ECB to step up its efforts to reduce the cost of financing, to provide liquidity and to implement the right incentives in order to restore interbank lending," it said.
"The ECB should take all actions and initiatives deemed appropriate as the crisis unfolds, including the purchase of commercial paper and other corporate debt instruments."
The ECB has cut its main rate by 2.75 percentage points over recent months to 1.5 per cent, but its borrowing costs still remain the highest among major developing economies.
BusinessEurope said governments should do their part in fighting the crisis by avoiding protectionism in trade and state subsidies, which could harm the EU's single market.
"National emergency plans should not be allowed to come at a cost for EU integration, unity and cohesion," the group said.
Some poorer EU members from central and eastern Europe fear their economies would be put at a disadvantage when richer, Western countries try to spend their way out of recession.
"Financial markets have already started to question the sustainability of public finances in several member states as widening spreads across euro area member states underline," BusinessEurope noted as concern grows over the fiscal positions of Ireland and Greece.
The group urged the European Commission to enforce firmly the EU's competition and state aid rules, despite calls from some politicians to relax them because of the crisis.
BusinessEurope said governments should help companies by speeding up the return of value-added tax and other tax refunds.
Reuters