Euro crisis likely to play on global markets yet again

By Stella Dawson, Reuters

WASHINGTON — Greece ditching the euro, huge tax hikes and spending cuts in the United States in 2013, plus a showdown over Iran’s nuclear ambitions are three big political risks looming over a global economic recovery that looks more uncertain by the day. The global outlook clouded late last week. The European Commission downgraded growth forecasts for Spain and Greece; China reported weak retail sales, bank lending and industrial output; and India’s industrial output slumped for the first time in five months. The U.S. economy already has hit a soft patch. Its giant service sector is slowing and employment growth has cooled. While U.S. manufacturing is holding firm, weakness in Asia and Europe makes it vulnerable to loss of export markets. One bright spot for the global economy is oil. If high-level meetings this week with Iran succeed in defusing nuclear tensions, growth could get a major fillip from lower oil prices. Brent crude prices already have fallen by 9 percent since early March, and the Institute of International Finance estimates they could retreat a further 14 percent to 18 percent if the political risk premium from Iran was squeezed out. Relief from political risks stemming from the United States, however, will take much longer. Resolving U.S. budget battles, which threaten to thrust the nation back into recession next year if planned tax increases and budget cuts go through, must await the November presidential and congressional elections. Europe Immediate Wild Card

That leaves Europe as the immediate wild card in the deck. “The question for 2012 is whether the euro zone will limp through without anything worse than the kind of slow-motion recession underway now,” said David Levy, chairman of the Jerome Levy Forecasting Center. A week after 70 percent of Greece’s electorate rejected the harsh budget cutbacks required under a joint European Union/IMF bailout, leaders in Athens have failed to form a government. This has revived market talk that Greek could default, and perhaps even exit the euro zone, spooking investors still raw from the Lehman Brothers collapse and leaving them uncertain whether they would escape damage. At best, Levy said, Europe cannot escape a severe retrenchment over the next few years, which will drag on global growth. The euro zone shrank 0.3 percent in the fourth quarter and analysts forecast that GDP data due o n T uesday will show a further 0.2 percent decline in the first quarter. If the numbers come in even worse, they will add momentum to socialist French President-elect Francois Hollande’s call for Europe to embrace a new growth strategy. Euro zone finance ministers will discuss a growth pact for Europe to complement their strict budgetary rules, known as the Fiscal Compact, at a meeting on Monday.