The threat of a European policy blunders returning to surprise markets next year should be taken as seriously as risks emerging from the anticipated US "fiscal cliff", Bank of America Merrill Lynch has warned.
Europeans headed for fiscal cliff of their own
The threat of a European policy blunder returning to surprise markets next year should be taken as seriously as risks emerging from the anticipated "fiscal cliff" in the United States, Bank of America Merrill Lynch has warned.
Business leaders have spent much of this year calling on the US congress to avert the fiscal cliff by reaching the compromise on deficit reduction that eluded policymakers during talks over the nation's debt ceiling last year.
The fiscal cliff is a mix of automatic tax rises and spending cuts that are due to take effect next month, likely plunging the world's largest economy into recession.
But Europe could see similar risks emanating from policymakers' inaction, said Johannes Jooste, the head of strategy for Europe, the Middle East and Africa at Bank of America Merrill Lynch.
A "euro-cliff" could unexpectedly materialise next year if markets once again lose faith in the 17-nation currency bloc and governments in the euro zone are too slow to act.
"The risk is of something happens by accident because they procrastinate," he said, adding that a spike in government bond yields if not swiftly contained could be one such trigger for this kind of crisis.
"We don't think they'll actively try to engineer one," he said. "The cost of doing so outweighs the benefits by a long margin … From a political point of view the objective across the board appears to be to keep the union together."
Starting last December, the European Central Bank undertook a series of unprecedented policy measures to minimise the risk of a market-led run on euro-zone banks and sovereign debts.
The IMF said in October that the cumulative effect of all of the measures was expected to reduce US GDP by 4 per cent during next year, causing growth to "stall" and inflicting "large spillovers on major US trading partners".
Mr Jooste said the risks of a Thelma & Louise moment were unlikely, referring to the Hollywood finale that involves the 1991 movie's heroines bravely speeding off a cliff edge. US politicians were more likely to come up with some kind of fudge to avert such a large loss of output, he said.
In an echo of last year's debt reduction talks, congressional Republicans submitted a US$2.2 trillion (Dh8.08tn) deficit reduction plan yesterday. It was quickly shot down by the White House as light on detail.
Investor panics around the euro zone have receded during the past year even as the trading bloc's economy ground to a halt, with the Stoxx 600 index of European equities advancing 13 per cent year-to-date.
Spain received approval for funding of up to €39.5 billion (Dh189.83bn) for the recapitalisation of its bank bailout fund from other European countries this week, ending investor uncertainty over when a rescue would come.
Meanwhile, Greece announced a buyback of €10bn in debts this week as efforts continue to bring the stricken country's debt-to-GDP ratio down to more manageable levels.
"We've been consistently saying the Europeans aren't silly enough to blow the thing up on purpose," said Mr Jooste.
The next step would be for euro zone countries to press ahead with measures to unify banking supervision, with coordination of budgets likely to occupy European policymakers after that, he added.
The global economy would be likely to stabilise at 3.2 per cent this year, with the UAE economy in line with the global average, he said.
The major hit to UAE growth would be the extent to which deleveraging by global banks had an impact on world trade.