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Fitch Predicts No End to Europe’s Crisis Without Growth Policies

Feb. 7 (Bloomberg) -- Europe won’t surface from its debt crisis until the region puts in place policies that can support economic growth, according to Fitch Ratings.

“The crisis won’t be over until we see a sustained economic recovery, which is crucial in terms of helping to reduce government debt ratios, easing problems of bank asset quality and in terms of the political situation,” Ed Parker, managing director at Fitch, said yesterday in an interview in Oslo. “If there is no growth, then we are likely to see opposition to perpetual austerity intensifying.”

The International Monetary Fund estimates the euro region will suffer a second year of economic decline in 2013 as austerity chokes demand. Spain, the currency bloc’s fourth-largest economy, is sinking into a deeper recession as the government cuts spending to meet budget goals. The nation’s plight will prove “pivotal” for Europe’s recovery outlook, Parker said.

Yields on Spanish debt have started to rise again as investors signal they want Europe’s governments to do more to stem the crisis. While European Central Bank President Mario Draghi’s July pledge to do whatever it takes to protect the euro helped eased default fears, concern is now growing that more is needed to fix Europe’s bleak economic prospects.

‘Muddling Through’

“There has been progress since the summer, but we think we are still in this process of muddling through,” Parker said. “We don’t think the crisis has been resolved.”

The government in Madrid has signaled it probably missed a goal of narrowing its budget deficit to 6.3 percent of gross domestic product last year. Spain’s economy contracted 0.7 percent in the three months through December from the previous quarter, when it fell 0.3 percent, government figures showed last month.

The country’s record unemployment, shrinking output and bank bailout costs almost wipe out its 62 billion euros in austerity measures, according to economists at Societe Generale SA and the Madrid-based Applied Economic Research Foundation.

As the euro area focuses on budget cuts to stem its debt crisis, the region’s economy will shrink 0.2 percent this year, the IMF said Jan. 23. That follows a 0.4 percent drop in 2012.

Goldman Sachs Group Inc. President Gary Cohn also said yesterday that Europe faces “fundamental problems” and that policy makers don’t appear to have a plan for generating economic growth in the region’s southern nations.

No Solutions

“No one has solved the European economic issue for me yet,” Cohn said in an interview with Bloomberg Television’s Susan Li in Hong Kong. “No one’s given me an explanation of how we’re really going to create growth in Greece, or in Spain, or in other peripheral countries.”

In Italy, prospects of a change of government that could see a return to power by former premier Silvio Berlusconi are also spooking bond markets. Italians decide who will govern the euro region’s third-largest economy in Feb. 24-25 elections.

In response to demands for more growth-friendly policies, Italian Prime Minister Mario Monti has watered down labor-market reforms following resistance from the country’s biggest union. His Spanish counterpart, Mariano Rajoy, last month extended emergency aid for the jobless and postponed a plan to shrink local governments.

“It is unrealistic to expect a linear improvement since the summer,” Parker said. “There are always likely to be some hick-ups and potentially more serious setbacks, creating some market volatility on the route out of the crisis.”

To contact the reporter on this story: Josiane Kremer in Oslo at jkremer4@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net

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