Euro debt marathon is damaging world trade

Euro debt marathon is damaging world tradeInvestors are blaming the threat of recession and a slowdown in global trade on the failure of political leaders to solve the eurozone debt crisis.

Fund managers pinpoint the ongoing Euro upset as the ‘most worrying’ problem for the global economy.

The opinion comes from John Greenwood, Chief Economist at Invesco, in his quarterly investment review.

Besides urging European leaders to sort out their economic problems, he sees UK inflation falling to 2% by the end of 2012 and moderate growth in the US economy.

Covering the eurozone, Greenwood says that as the European Union represents about 20% of global GDP, the crisis generates recession in the region, but also hampers global trade, undermining growth in the UK, Eastern Europe, North America and Asia.

“The crisis in the Eurozone is no nearer resolution. Without a fiscal union the monetary union will collapse either as a result of accelerating bank runs in the periphery, or as a result of elections that bring radical leaders to power,” said Greenwood.

“Either set of events could cause moderate leaders in the core to lose control of events, resulting in an exit for one or more of the crisis economies.

“Unfortunately for the monetary union, euro-area leaders are as reluctant as ever to embark on a far-reaching fiscal union because a federal Eurozone Treasury with powers to tax, control spending and issue bonds would be incompatible with the retention of national sovereignty.”

Invesco also sees tough times ahead for the US and China, as the world’s largest economies.

“Real GDP growth appears to be losing momentum again,” said Greenwood. “The current policy impasse has shifted attention to the possibility of a ‘fiscal cliff’ in early 2013 with the risk of a sharp cuts in government spending and a simultaneous rise in taxes together creating a hit to GDP of between 3% and 5%.”

“In China, the economy has avoided a hard landing but it is clearly still slowing under the pressure of both domestic as well as external factors. On the domestic side the policy-makers are still trying to bring shadow bank lending and property prices under control.”