Europe to Move into Recession Early Next Year

The continued uncertainty in the markets has led to widespread concern over the European economy. Despite reassurances in 2010  that the market will pick up, the banks and politicians in the UK have begun to wake up to the realisation that the threat of a double dip recession is now very real.

A recent report by analysts at the Royal Bank of Scotland forecast that Europe will move into recession early next year. This is somewhat unsurprising to many seasoned economists who consider a default by Greece to be inevitable as they have borrowed far in excess of their means. The impact of such a default could unleash a second credit crisis, with potentially greater impact than the collapse of Lehman Brothers in 2008. This could lead to a collapse of the Euro altogether.

A number of banks are exposed to a Greek default and so it is recommended that businesses ensure that their assets are spread across a number of banks in order to minimise their risk. The government has promised a savings guarantee to UK taxpayers who will be covered for bank deposits of up to £50,000.  Two of the major banks in France have recently had their credit ratings downgraded in light of their exposure to the economic crisis.

For the time being, the UK is relying on the private sector to drive the economic recovery through investment and job creation. However, this is hampered by widespread cutbacks in the public sector and the tendency by banks to inhibit small businesses from raising equity or debt finance in the capital markets. The government will need to tackle both of these issues in order to drive the recovery.